There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Beacon Roofing Supply’s (NASDAQ:BECN) returns on capital, so let’s have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.16 = US$734m ÷ (US$6.2b – US$1.7b) (Based on the trailing twelve months to September 2022).
Therefore, Beacon Roofing Supply has an ROCE of 16%. That’s a pretty standard return and it’s in line with the industry average of 16%.
View our latest analysis for Beacon Roofing Supply
NasdaqGS:BECN Return on Capital Employed December 11th 2022
Above you can see how the current ROCE for Beacon Roofing Supply compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Beacon Roofing Supply’s ROCE Trend?
We like the trends that we’re seeing from Beacon Roofing Supply. Over the last five years, returns on capital employed have risen substantially 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 67%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
What We Can Learn From Beacon Roofing Supply’s ROCE
In summary, it’s great to see that Beacon Roofing Supply can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
On a separate note, we’ve found 2 warning signs for Beacon Roofing Supply you’ll probably want to know about.
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