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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Eastern's (NASDAQ:EML) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Eastern is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$20m ÷ (US$244m - US$48m) (Based on the trailing twelve months to September 2024).
Thus, Eastern has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Machinery industry average it falls behind.
Check out our latest analysis for Eastern
Historical performance is a great place to start when researching a stock so above you can see the gauge for Eastern's ROCE against it's prior returns. If you're interested in investigating Eastern's past further, check out this free graph covering Eastern's past earnings, revenue and cash flow.
What Can We Tell From Eastern's ROCE Trend?
Eastern's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 24% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Eastern's ROCE
In summary, we're delighted to see that Eastern has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 15% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Like most companies, Eastern does come with some risks, and we've found 1 warning sign that you should be aware of.