If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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 when we looked at Stantec (TSE:STN) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Stantec, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = CA$457m ÷ (CA$6.0b – CA$1.5b) (Based on the trailing twelve months to June 2023).
Therefore, Stantec has an ROCE of 10%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 9.9%.
View our latest analysis for Stantec
Above you can see how the current ROCE for Stantec compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Stantec here for free.
What Does the ROCE Trend For Stantec Tell Us?
The trends we’ve noticed at Stantec are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
In Conclusion…
All in all, it’s terrific to see that Stantec is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 161% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Stantec does have some risks though, and we’ve spotted 2 warning signs for Stantec that you might be interested in.
While Stantec 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.
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