A look at Epiroc’s impressive returns on capital (STO: EPI A)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? First, we would like to identify a growth to recover on capital employed (ROCE) and in parallel, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. So when we looked through our eyes from Epiroc (STO: EPI A) trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Epiroc:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.26 = kr8.3b ÷ (kr45b – kr13b) (Based on the last twelve months up to June 2021).
So, Epiroc has a ROCE of 26%. It’s a fantastic return and not only that, it exceeds the 17% average earned by companies in a similar industry.
See our latest review for Epiroc
In the graph above, we measured Epiroc’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view the analysts’ forecasts covering Epiroc here for free.
What does Epiroc’s ROCE trend tell us?
It’s hard not to be impressed by Epiroc’s returns on capital. Over the past five years, ROCE has remained relatively stable at around 26% and the company has deployed 58% additional capital in its operations. With such high returns, it’s great that the company can continually reinvest their money at such attractive rates of return. If Epiroc can keep up this pace, we would be very optimistic about its future.
What we can learn from Epiroc’s ROCE
In short, we would say that Epiroc has the makings of a multi-bagger since it has been able to compose its capital at very profitable rates of return. So it’s no surprise that shareholders got a respectable 84% return if they owned in the past three years. So while investors seem to recognize these promising trends, we still believe the stock deserves further research.
Epiroc does carry certain risks, however, and we have identified 2 warning signs for Epiroc that might interest you.
If you want to look for more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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