Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Parker-Hannifin's (NYSE:PH) returns on capital, so let's have a look.
We've discovered 1 warning sign about Parker-Hannifin. View them for free.What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Parker-Hannifin is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$4.1b ÷ (US$28b - US$6.0b) (Based on the trailing twelve months to December 2024).
Therefore, Parker-Hannifin has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Machinery industry.
Check out our latest analysis for Parker-Hannifin
In the above chart we have measured Parker-Hannifin'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 Parker-Hannifin for free.
So How Is Parker-Hannifin's ROCE Trending?
Investors would be pleased with what's happening at Parker-Hannifin. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. So we're very much inspired by what we're seeing at Parker-Hannifin thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that Parker-Hannifin can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know about the risks facing Parker-Hannifin, we've discovered 1 warning sign that you should be aware of.
While Parker-Hannifin 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.