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Deere (NYSE:DE) Is Looking To Continue Growing Its Returns On Capital

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Deere's (NYSE:DE) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Deere:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = US$8.0b ÷ (US$84b - US$29b) (Based on the trailing twelve months to May 2022).

Thus, Deere has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Machinery industry.

See our latest analysis for Deere

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In the above chart we have measured Deere's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We like the trends that we're seeing from Deere. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 39%. So we're very much inspired by what we're seeing at Deere thanks to its ability to profitably reinvest capital.

The Bottom Line On Deere's ROCE

In summary, it's great to see that Deere can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Deere can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Deere, we've spotted 3 warning signs, and 1 of them is concerning.

While Deere isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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