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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Stelrad Group (LON:SRAD) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Stelrad Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = UK£29m ÷ (UK£242m - UK£90m) (Based on the trailing twelve months to June 2024).
Therefore, Stelrad Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Consumer Durables industry.
See our latest analysis for Stelrad Group
Above you can see how the current ROCE for Stelrad Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Stelrad Group .
So How Is Stelrad Group's ROCE Trending?
We like the trends that we're seeing from Stelrad Group. The data shows that returns on capital have increased substantially over the last five years to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. So we're very much inspired by what we're seeing at Stelrad Group thanks to its ability to profitably reinvest capital.
The Bottom Line On Stelrad Group's ROCE
All in all, it's terrific to see that Stelrad Group is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 25% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 2 warning signs facing Stelrad Group that you might find interesting.
While Stelrad Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.