Westinghouse Air Brake Technologies (NYSE:WAB) Has Some Way To Go To Become A Multi-Bagger
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think Westinghouse Air Brake Technologies (NYSE:WAB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Westinghouse Air Brake Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = US$1.2b ÷ (US$19b - US$4.2b) (Based on the trailing twelve months to June 2023).
Thus, Westinghouse Air Brake Technologies has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.
Check out our latest analysis for Westinghouse Air Brake Technologies
In the above chart we have measured Westinghouse Air Brake Technologies' 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 report for Westinghouse Air Brake Technologies.
So How Is Westinghouse Air Brake Technologies' ROCE Trending?
In terms of Westinghouse Air Brake Technologies' historical ROCE trend, it doesn't exactly demand attention. The company has employed 192% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Westinghouse Air Brake Technologies' ROCE
In conclusion, Westinghouse Air Brake Technologies has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 6.4% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing to note, we've identified 1 warning sign with Westinghouse Air Brake Technologies and understanding this should be part of your investment process.
While Westinghouse Air Brake Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
