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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. With that in mind, the ROCE of Reliance Worldwide (ASX:RWC) looks decent, right now, so lets see what the trend of returns can tell us.
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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 Reliance Worldwide is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$219m ÷ (US$2.1b - US$214m) (Based on the trailing twelve months to December 2024).
So, Reliance Worldwide has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 10%.
Check out our latest analysis for Reliance Worldwide
Above you can see how the current ROCE for Reliance Worldwide 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 Reliance Worldwide .
The Trend Of ROCE
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 34% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Reliance Worldwide has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
In the end, Reliance Worldwide has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 75% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.