Simpson Manufacturing (NYSE:SSD) Is Investing Its Capital With Increasing Efficiency
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at the ROCE trend of Simpson Manufacturing (NYSE:SSD) we really liked 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. Analysts use this formula to calculate it for Simpson Manufacturing:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$478m ÷ (US$2.6b - US$331m) (Based on the trailing twelve months to March 2023).
Therefore, 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 15%.
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?
Investors would be pleased with what's happening at Simpson Manufacturing. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 148%. So we're very much inspired by what we're seeing at Simpson Manufacturing thanks to its ability to profitably reinvest capital.
What We Can Learn From Simpson Manufacturing's ROCE
All in all, it's terrific to see that Simpson Manufacturing is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 168% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Simpson Manufacturing does come with some risks, and we've found 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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