NYSE:CAT) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.” data-reactid=”28″ type=”text”>What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don’t think Caterpillar (NYSE:CAT) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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. The formula for this calculation on Caterpillar is:
(Based on the trailing twelve months to June 2020).” data-reactid=”36″ type=”text”>0.12 = US$6.1b ÷ (US$77b – US$25b) (Based on the trailing twelve months to June 2020).
here for free.” data-reactid=”51″ type=”text”>In the above chart we have measured Caterpillar’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Caterpillar here for free.
What Can We Tell From Caterpillar’s ROCE Trend?
Things have been pretty stable at Caterpillar, with its capital employed and returns on that capital staying somewhat the same for the last five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Caterpillar in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Caterpillar has been paying out a decent 45% of its earnings to shareholders. Given the business isn’t reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Key Takeaway
We can conclude that in regards to Caterpillar’s returns on capital employed and the trends, there isn’t much change to report on. Yet to long term shareholders the stock has gifted them an incredible 111% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
1 warning sign that our analysis has discovered.” data-reactid=”56″ type=”text”>If you want to continue researching Caterpillar, you might be interested to know about the 1 warning sign that our analysis has discovered.
list of companies that are earning high returns on equity with solid balance sheets.” data-reactid=”57″ type=”text”>While Caterpillar isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.