What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Sherwin-Williams' (NYSE:SHW) returns on capital, so let's have a look.

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. To calculate this metric for Sherwin-Williams, this is the formula:

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

0.18 = US$3.0b ÷ (US$23b - US$6.0b) (Based on the trailing twelve months to December 2022).

So, Sherwin-Williams has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Chemicals industry.

Check out our latest analysis for Sherwin-Williams

Above you can see how the current ROCE for Sherwin-Williams 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 Sherwin-Williams here for free.

What The Trend Of ROCE Can Tell Us

Sherwin-Williams has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 67% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Sherwin-Williams' ROCE

In summary, we're delighted to see that Sherwin-Williams has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Sherwin-Williams can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Sherwin-Williams (including 1 which is concerning) .

While Sherwin-Williams isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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