What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Spirax-Sarco Engineering (LON:SPX), it didn't seem to tick all of these boxes.

Understanding 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 Spirax-Sarco Engineering is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = UK￡308m ÷ (UK￡2.7b - UK￡454m) (Based on the trailing twelve months to December 2023).

So, Spirax-Sarco Engineering has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Machinery industry.

See our latest analysis for Spirax-Sarco Engineering

Above you can see how the current ROCE for Spirax-Sarco Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Spirax-Sarco Engineering .

What The Trend Of ROCE Can Tell Us

In terms of Spirax-Sarco Engineering's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 23% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Spirax-Sarco Engineering is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 8.5% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Spirax-Sarco Engineering does have some risks though, and we've spotted 1 warning sign for Spirax-Sarco Engineering that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.