Investors encounter slowing returns on capital at Rotork (LON: ROR)

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends to watch out for. Ideally, a business will display two trends; first growth return on capital employed (ROCE) and, on the other hand, an increase amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. That said, while the ROCE is currently high for Rotork (LON: ROR), we don’t jump out of our chairs because the returns are decreasing.

What is Return on Capital Employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. To calculate this metric for Rotork, here is the formula:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.20 = UK £ 128m ÷ (UK £ 763m – UK £ 122m) (Based on the last twelve months up to December 2020).

Therefore, Rotork has a ROCE of 20%. This is a fantastic return and not only that, it exceeds the 8.9% average earned by companies in a similar industry.

See our latest review for Rotork

LSE: ROR Return on Capital Employed May 27, 2021

Above you can see how Rotork’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you like, you can view analyst forecasts covering Rotork here for free.

The ROCE trend

There hasn’t been much to report on Rotork’s performance and level of capital employed, as both metrics have been stable for the past five years. Companies with these characteristics tend to be mature and stable operations as they are past the growth phase. While the current yields are high, we would need more evidence of the underlying growth to make it look like a multi-bagger in the future. This probably explains why Rotork pays 45% of its income to shareholders in the form of dividends. Since the company does not reinvest in itself, it makes sense to distribute a portion of the profits among the shareholders.

The bottom line

Although Rotork has an impressive return on capital, it does not increase this amount of capital. Given that the stock has gained an impressive 92% over the past five years, investors must think there are better things to come. Ultimately, if the underlying trends persist, we wouldn’t be holding our breath that this is a multi-bagger in the future.

If you are interested in knowing the risks Rotork faces, we have discovered 1 warning sign that you need to be aware of.

If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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