What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at ESAB (NYSE:ESAB) and its trend of ROCE, we really liked what we saw.
Understanding 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. The formula for this calculation on ESAB is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$467m ÷ (US$4.2b – US$672m) (Based on the trailing twelve months to April 2025).
Thus, ESAB has an ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 12% generated by the Machinery industry.
Above you can see how the current ROCE for ESAB 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 ESAB for free.
What The Trend Of ROCE Can Tell Us
ESAB’s ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 50% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Key Takeaway
To sum it up, ESAB is collecting higher returns from the same amount of capital, and that’s impressive. Since the stock has returned a staggering 189% to shareholders over the last three years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
One more thing to note, we’ve identified 1 warning sign with ESAB and understanding it should be part of your investment process.