To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 ran our eye over Timken's (NYSE:TKR) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Timken:

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

0.11 = US$641m ÷ (US$6.6b - US$941m) (Based on the trailing twelve months to June 2024).

So, Timken has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Machinery industry.

View our latest analysis for Timken

In the above chart we have measured Timken'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 Timken for free.

So How Is Timken's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 42% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Timken has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Timken has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 70% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for Timken you'll probably want to know about.

While Timken may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.