Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at CECO Environmental (NASDAQ:CECO) 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. To calculate this metric for CECO Environmental, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$40m ÷ (US$600m - US$203m) (Based on the trailing twelve months to December 2023).
So, CECO Environmental has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.
In the above chart we have measured CECO Environmental's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CECO Environmental .
How Are Returns Trending?
The trends we've noticed at CECO Environmental are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 38%. 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 CECO Environmental's ROCE
All in all, it's terrific to see that CECO Environmental is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 190% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if CECO Environmental can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing CECO Environmental that you might find interesting.
While CECO Environmental isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.