Investors Shouldn't Overlook The Favourable Returns On Capital At Snap-on (NYSE:SNA)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Snap-on (NYSE:SNA) looks attractive right now, so lets see what the trend of returns can tell us.
What Is 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. Analysts use this formula to calculate it for Snap-on:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$1.2b ÷ (US$6.8b - US$994m) (Based on the trailing twelve months to October 2022).
So, Snap-on has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 11%.
Check out our latest analysis for Snap-on
In the above chart we have measured Snap-on's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Snap-on Tell Us?
We'd be pretty happy with returns on capital like Snap-on. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 45% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Snap-on can keep this up, we'd be very optimistic about its future.
In Conclusion...
In short, we'd argue Snap-on has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 54% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 1 warning sign for Snap-on that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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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