If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Eaton (NYSE:ETN) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Eaton is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$4.1b ÷ (US$39b – US$7.6b) (Based on the trailing twelve months to March 2024).
Thus, Eaton has an ROCE of 13%. That’s a pretty standard return and it’s in line with the industry average of 13%.
See our latest analysis for Eaton
In the above chart we have measured Eaton’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 Eaton for free.
What The Trend Of ROCE Can Tell Us
There hasn’t been much to report for Eaton’s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn’t expect Eaton to be a multi-bagger going forward. This probably explains why Eaton is paying out 33% of its income to shareholders in the form of dividends. Given the business isn’t reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
What We Can Learn From Eaton’s ROCE
We can conclude that in regards to Eaton’s returns on capital employed and the trends, there isn’t much change to report on. Yet to long term shareholders the stock has gifted them an incredible 307% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
If you’re still interested in Eaton it’s worth checking out our FREE intrinsic value approximation for ETN to see if it’s trading at an attractive price in other respects.
While Eaton 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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com