What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Renishaw (LON:RSW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Renishaw:

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

0.15 = UK£137m ÷ (UK£1.0b - UK£102m) (Based on the trailing twelve months to June 2023).

So, Renishaw has an ROCE of 15%.  That's a relatively normal return on capital, and it's around the 13% generated by the Electronic industry.

Check out our latest analysis for Renishaw  roce

In the above chart we have measured Renishaw's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our freereport for Renishaw.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Renishaw doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 23% five years ago. However it looks like Renishaw might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.



The Key Takeaway

To conclude, we've found that Renishaw is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

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

While Renishaw isn't earning the highest return, check out this freelist of companies that are earning high returns on equity with solid balance sheets.

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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.