What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Stride (NYSE:LRN) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Stride:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$217m ÷ (US$1.8b - US$241m) (Based on the trailing twelve months to December 2023).
So, Stride has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 7.6% it's much better.
Above you can see how the current ROCE for Stride compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Stride for free.
The Trend Of ROCE
We like the trends that we're seeing from Stride. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 140%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Stride's ROCE
To sum it up, Stride has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 80% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Stride, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Stride isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.