Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after investigating Allegation (NYSE:ALLE), we don’t think current trends fit the mold of a multi-bagger.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Allegion:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = $540 million ÷ ($3.7 billion – $610 million) (Based on the last twelve months to June 2022).
Thereby, Allegion has a ROCE of 18%. In absolute terms, that’s a decent return, but compared to the building industry average of 14%, it’s much better.
Check out our latest analysis for Allegion
In the chart above, we measured Allegion’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free report for Allegion.
So, what is the ROCE trend for Allegion?
When we looked at the ROCE trend at Allegion, we didn’t gain much confidence. About five years ago the return on capital was 24%, but since then it has fallen to 18%. However, it looks like Allegion could reinvest for long-term growth, because while capital employed has increased, the company’s sales haven’t changed much over the past 12 months. It may take some time before the company begins to see a change in the income from these investments.
Our view on Allegion’s ROCE
In summary, Allegion is reinvesting funds into the business for growth, but unfortunately, it appears sales haven’t grown much yet. Unsurprisingly, the stock has only gained 33% over the past five years, potentially indicating that investors are taking this into account going forward. So if you’re looking for a multi-bagger, the underlying trends indicate you might have a better chance elsewhere.
One more thing: we have identified 3 warning signs with Allegion (at least 1 which is a bit nasty), and understanding them would definitely help.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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