Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Pentair (NYSE:PNR) looks quite promising in regards to its trends of return on capital.

Our free stock report includes 2 warning signs investors should be aware of before investing in Pentair. Read for free now.

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. The formula for this calculation on Pentair is:

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

0.16 = US$898m ÷ (US$6.4b - US$895m) (Based on the trailing twelve months to December 2024).

Therefore, Pentair has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Machinery industry.

Check out our latest analysis for Pentair

Above you can see how the current ROCE for Pentair 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 Pentair for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Pentair. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 64%. So we're very much inspired by what we're seeing at Pentair thanks to its ability to profitably reinvest capital.

In Conclusion...

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 Pentair has. Since the stock has returned a staggering 180% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Pentair does have some risks though, and we've spotted 2 warning signs for Pentair that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.