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Returns Are Gaining Momentum At Timken (NYSE:TKR)

Simply Wall St ·  Sep 25, 2022 09:25

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Timken (NYSE:TKR) so let's look a bit deeper.

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. To calculate this metric for Timken, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = US$584m ÷ (US$5.4b - US$921m) (Based on the trailing twelve months to June 2022).

Thus, Timken has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Machinery industry.

View our latest analysis for Timken

roceNYSE:TKR Return on Capital Employed September 25th 2022

In the above chart we have measured Timken's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Timken's ROCE Trending?

We like the trends that we're seeing from Timken. The data shows that returns on capital have increased substantially over the last five years to 13%. 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 67%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

To sum it up, Timken has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 37% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Like most companies, Timken does come with some risks, and we've found 1 warning sign that you should be aware of.

While Timken 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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