When looking for a multibagger, there are a few things to look out for. Typically, we will want to see a trend towards an increasing return on capital employed (ROCE) along with a growing capital employed base. Essentially, this means that a company has profitable initiatives to continue to reinvest in, which is a feature of a compounder. With that in mind, we’ve noticed some promising trends at Beacon Roofing Supply (NASDAQ:BECN), so let’s take a closer look.
Return on Capital Employed (ROCE): What is it?
For those unsure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. To calculate this metric for Beacon Roofing Supply, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = $689M ÷ ($5.9B – $1.3B) (Based on trailing 12 months ended March 2023).
Therefore, Beacon Roofing Supply has a 15% ROCE. That’s a normal return on investment in itself, and is in line with industry average returns of 15%.
Check out our latest analysis for Beacon Roofing Supply
In the chart above, we’ve compared Beacon Roofing Supply’s past ROCE to its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, be sure to check out ours free Report for Beacon Roofing Supply.
What can we say of Beacon Roofing Supply’s ROCE trend?
Beacon Roofing Supply is showing promise as its ROCE is trending up and to the right. If we look at the data, we can see that while capital employed at the company has remained relatively flat, generated ROCE has increased by 271% over the past five years. Basically, the company is generating higher returns from the same amount of capital, and this is evidence that there are improvements in the company’s efficiency. Things are looking good on that front, so it’s worth checking out what management has said about future growth plans.
The story goes on
What we can learn from Beacon Roofing Supply’s ROCE
In summary, Beacon Roofing Supply is generating higher returns for the same amount of capital, and that’s impressive. Investors may not yet be impressed by the favorable underlying trends, given that the stock has returned just 40% to shareholders over the past five years. With that in mind, we believe the stock deserves further investigation.
Beacon Roofing Supply does have some risks, however, and we’ve spotted them 1 Beacon Roofing Supply warning label that might interest you.
While Beacon Roofing Supply doesn’t have the highest ROI, check this out free List of companies that generate high returns on equity with strong balance sheets.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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