ESCO Technologies (NYSE:ESE) Has More To Do To Multiply In Value Going Forward
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. Although, when we looked at ESCO Technologies (NYSE:ESE), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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 ESCO Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$120m ÷ (US$1.7b - US$297m) (Based on the trailing twelve months to March 2023).
Therefore, ESCO Technologies has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.
View our latest analysis for ESCO Technologies
In the above chart we have measured ESCO Technologies' 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 ESCO Technologies here for free.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at ESCO Technologies. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 8.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On ESCO Technologies' ROCE
Long story short, while ESCO Technologies has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
While ESCO Technologies doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
While ESCO Technologies 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.
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