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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Eaton’s (NYSE:ETN) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Eaton:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$4.4b ÷ (US$39b – US$8.1b) (Based on the trailing twelve months to June 2024).
Thus, Eaton has an ROCE of 14%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Electrical industry average of 12%.
Check out our latest analysis for Eaton
Above you can see how the current ROCE for Eaton 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 Eaton for free.
The Trend Of ROCE
Eaton is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 29% over the last five years. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
Our Take On Eaton’s ROCE
To sum it up, Eaton is collecting higher returns from the same amount of capital, and that’s impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
While Eaton looks impressive, no company is worth an infinite price. The intrinsic value infographic for ETN helps visualize whether it is currently trading for a fair price.
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.