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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Crane's (NYSE:CR) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Crane, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$341m ÷ (US$2.6b - US$543m) (Based on the trailing twelve months to December 2024).
Thus, Crane has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 12% it's much better.
View our latest analysis for Crane
In the above chart we have measured Crane's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Crane for free.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at Crane. We found that the returns on capital employed over the last five years have risen by 27%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Crane appears to been achieving more with less, since the business is using 40% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Key Takeaway
In the end, Crane has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 412% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for CR on our platform that is definitely worth checking out.