There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Rockwell Automation (NYSE:ROK), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Rockwell Automation, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$1.5b ÷ (US$11b - US$3.3b) (Based on the trailing twelve months to December 2023).
So, Rockwell Automation has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Electrical industry.
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 for free.
What Can We Tell From Rockwell Automation's ROCE Trend?
In terms of Rockwell Automation's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Rockwell Automation's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Rockwell Automation is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you want to continue researching Rockwell Automation, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Rockwell Automation 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.