Yahoo Finance Some Investors May Be Worried About Spirax-Sarco Engineering's (LON:SPX) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Spirax-Sarco Engineering (LON:SPX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Spirax-Sarco Engineering, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = UK£253m ÷ (UK£1.7b - UK£228m) (Based on the trailing twelve months to December 2020).
Therefore, Spirax-Sarco Engineering has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.7% it's much better.
See our latest analysis for Spirax-Sarco Engineering
In the above chart we have measured Spirax-Sarco Engineering'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.
So How Is Spirax-Sarco Engineering's ROCE Trending?
When we looked at the ROCE trend at Spirax-Sarco Engineering, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 17%. However it looks like Spirax-Sarco Engineering might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Spirax-Sarco Engineering's ROCE
In summary, Spirax-Sarco Engineering is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 244% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know about the risks facing Spirax-Sarco Engineering, we've discovered 1 warning sign that you should be aware of.
While Spirax-Sarco Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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