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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. That's why when we briefly looked at Stanley Black & Decker's (NYSE:SWK) ROCE trend, we were pretty happy with what we saw.
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. The formula for this calculation on Stanley Black & Decker is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$2.5b ÷ (US$24b - US$4.6b) (Based on the trailing twelve months to April 2021).
Thus, Stanley Black & Decker has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Machinery industry.
In the above chart we have measured Stanley Black & Decker'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 Stanley Black & Decker here for free.
What The Trend Of ROCE Can Tell Us
While the returns on capital are good, they haven't moved much. The company has employed 62% more capital in the last five years, and the returns on that capital have remained stable at 13%. 13% is a pretty standard return, and it provides some comfort knowing that Stanley Black & Decker has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Stanley Black & Decker's ROCE
To sum it up, Stanley Black & Decker has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 109% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a separate note, we've found 3 warning signs for Stanley Black & Decker you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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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