Simpson Manufacturing (NYSE:SSD) Is Aiming To Keep Up Its Impressive Returns
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Simpson Manufacturing's (NYSE:SSD) ROCE trend, we were very happy with what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Simpson Manufacturing, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$502m ÷ (US$2.8b - US$428m) (Based on the trailing twelve months to September 2023).
Thus, Simpson Manufacturing has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Building industry average of 16%.
See our latest analysis for Simpson Manufacturing
In the above chart we have measured Simpson Manufacturing's 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 Simpson Manufacturing here for free.
What Does the ROCE Trend For Simpson Manufacturing Tell Us?
Simpson Manufacturing deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 158% more capital into its operations. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
What We Can Learn From Simpson Manufacturing's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 289% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
Simpson Manufacturing is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
