Yahoo Finance Encore Wire (NASDAQ:WIRE) Is Very Good At Capital Allocation
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Encore Wire (NASDAQ:WIRE) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Encore Wire, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$380m ÷ (US$2.0b - US$168m) (Based on the trailing twelve months to March 2024).
Thus, Encore Wire has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Electrical industry average of 13%.
View our latest analysis for Encore Wire
Above you can see how the current ROCE for Encore Wire 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 Encore Wire for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Encore Wire. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 147% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Encore Wire's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Encore Wire has. Since the stock has returned a staggering 419% to shareholders over the last five 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.
On a final note, we've found 1 warning sign for Encore Wire that we think you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
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