Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Allegion's (NYSE:ALLE) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Allegion is:

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

0.20 = US$784m ÷ (US$5.0b - US$1.1b) (Based on the trailing twelve months to September 2024).

Thus, Allegion has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Building industry average of 15%.

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

What Can We Tell From Allegion's ROCE Trend?

It's hard not to be impressed by Allegion's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 64% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

What We Can Learn From Allegion's ROCE

In summary, we're delighted to see that Allegion has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 26% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Allegion is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching Allegion, you might be interested to know about the 1 warning sign that our analysis has discovered.

Allegion is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.