If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Ecolab (NYSE:ECL) looks quite promising in regards to its trends of return on capital.
We've discovered 2 warning signs about Ecolab. View them for free.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. Analysts use this formula to calculate it for Ecolab:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$2.7b ÷ (US$22b - US$4.8b) (Based on the trailing twelve months to December 2024).
So, Ecolab has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Chemicals industry.
View our latest analysis for Ecolab
In the above chart we have measured Ecolab's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ecolab .
How Are Returns Trending?
Ecolab is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 25% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Ecolab's ROCE
To sum it up, Ecolab is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 30% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Ecolab does have some risks though, and we've spotted 2 warning signs for Ecolab that you might be interested in.
While Ecolab isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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