Shareholders are optimistic that Snap-on (NYSE:SNA) will multiply in value

What trends should we look for when we want to identify stocks that can multiply in value over the long term? First, we want to see a growing to return on the capital employed (ROCE) and then alongside it an ever increasing base of the capital employed. Basically, this means that a company has profitable initiatives in which it can continue to reinvest, which is a characteristic of a compounding machine. That is why, when we briefly discussed Attachable (NYSE:SNA) ROCE trend, we were very pleased with what we saw.

What is return on capital employed (ROCE)?

Just to clarify in case you’re not sure, ROCE is a metric used to evaluate how much pre-tax profit (as a percentage) a company generates with the capital invested in its business. Analysts use this formula to calculate it for Snap-on:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.20 = $1.4 billion ÷ ($7.7 billion – $990 million) (Based on the last twelve months to March 2024).

Therefore, Snap-on has a ROCE of 20%. That’s a fantastic return, and not only that, it also beats the 13% average earned by companies in a similar industry.

Check out our latest analysis for Snap-on

Above you can see how the current ROCE for Snap-on compares to previous returns on capital, but there is only so much to be inferred from the past. If you are interested, you can check out analyst forecasts in our free Analyst report for Snap-on.

How are returns developing?

Snap-on deserves praise for its returns. Over the past five years, its return on capital has remained relatively stable at around 20%, and the company has invested 47% more capital into its business. When you consider that the return on capital is an attractive 20%, this combination is actually quite attractive because it means the company can consistently deploy its cash and generate these high returns. That’s what you see when you look at well-run companies or cheap business models.

What we can learn from Snap-on’s ROCE

In summary, we are pleased that Snap-on has been able to grow its earnings through reinvestment with consistently high returns, as these are common characteristics of a multi-bagger. Therefore, it is no surprise that shareholders have received a respectable 84% return by holding over the past five years. While the positive underlying trends can be attributed to investors, we still think this stock is worth investigating further.

We also found 1 warning label for Snap-on You probably want to know more about it.

If you want to see other companies that deliver high returns, check out our free List of companies with high returns and solid balance sheets can be found here.

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