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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Weir Group (LON:WEIR) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Weir Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£361m ÷ (UK£3.9b - UK£902m) (Based on the trailing twelve months to June 2024).
Therefore, Weir Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 13%.
See our latest analysis for Weir Group
Above you can see how the current ROCE for Weir 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 Weir Group .
What Can We Tell From Weir Group's ROCE Trend?
Weir Group has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 68%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 24% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line On Weir Group's ROCE
From what we've seen above, Weir Group has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 67% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.
While Weir Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for WEIR helps visualize whether it is currently trading for a fair price.