The Returns At Illinois Tool Works (NYSE:ITW) Aren't Growing
There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Looking at Illinois Tool Works (NYSE:ITW), it does have a high ROCE right now, but lets see how returns are trending.
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. Analysts use this formula to calculate it for Illinois Tool Works:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = US$4.1b ÷ (US$16b - US$4.7b) (Based on the trailing twelve months to December 2023).
Thus, Illinois Tool Works has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Machinery industry average of 13%.
See our latest analysis for Illinois Tool Works
In the above chart we have measured Illinois Tool Works' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Illinois Tool Works .
The Trend Of ROCE
Things have been pretty stable at Illinois Tool Works, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So it may not be a multi-bagger in the making, but given the decent 38% return on capital, it'd be difficult to find fault with the business's current operations. With fewer investment opportunities, it makes sense that Illinois Tool Works has been paying out a decent 49% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
What We Can Learn From Illinois Tool Works' ROCE
While Illinois Tool Works has impressive profitability from its capital, it isn't increasing that amount of capital. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 103% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, Illinois Tool Works does come with some risks, and we've found 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
