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What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Weir Group (LON:WEIR) so let's look a bit deeper.
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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 Weir Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = UK£390m ÷ (UK£3.8b - UK£747m) (Based on the trailing twelve months to December 2024).
Therefore, Weir Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Machinery industry.
See our latest analysis for Weir Group
In the above chart we have measured Weir Group'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 Weir Group for free.
So How Is Weir Group's ROCE Trending?
Weir Group's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 48% whilst employing roughly the same amount of capital. 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.
One more thing to note, Weir Group has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Weir Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Key Takeaway
To sum it up, Weir Group is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 167% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Weir Group can keep these trends up, it could have a bright future ahead.