If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Rockwell Automation (NYSE:ROK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 Rockwell Automation is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$1.6b ÷ (US$11b - US$1.3b) (Based on the trailing twelve months to September 2023).
Thus, Rockwell Automation has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 14%.
See our latest analysis for Rockwell Automation
In the above chart we have measured Rockwell Automation'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 Rockwell Automation here for free.
What Can We Tell From Rockwell Automation's ROCE Trend?
When we looked at the ROCE trend at Rockwell Automation, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 32% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Rockwell Automation has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Rockwell Automation's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Rockwell Automation. And the stock has followed suit returning a meaningful 70% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know about the risks facing Rockwell Automation, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.