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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Spirax Group (LON:SPX), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Spirax Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = UK£298m ÷ (UK£2.7b - UK£453m) (Based on the trailing twelve months to June 2024).
Therefore, Spirax Group has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
Check out our latest analysis for Spirax Group
Above you can see how the current ROCE for Spirax Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Spirax Group .
What Does the ROCE Trend For Spirax Group Tell Us?
On the surface, the trend of ROCE at Spirax Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 13%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Spirax Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Spirax Group does have some risks though, and we've spotted 1 warning sign for Spirax Group that you might be interested in.