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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? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Oxford Instruments' (LON:OXIG) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Oxford Instruments is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = UK£61m ÷ (UK£606m - UK£198m) (Based on the trailing twelve months to March 2024).
Therefore, Oxford Instruments has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Electronic industry.
View our latest analysis for Oxford Instruments
Above you can see how the current ROCE for Oxford Instruments compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Oxford Instruments for free.
So How Is Oxford Instruments' ROCE Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that Oxford Instruments has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On Oxford Instruments' ROCE
The main thing to remember is that Oxford Instruments has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 84% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Oxford Instruments could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for OXIG on our platform quite valuable.