To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Barrett Business Services (NASDAQ:BBSI) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Barrett Business Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = US$46m ÷ (US$772m – US$316m) (Based on the trailing twelve months to June 2020).
So, Barrett Business Services has an ROCE of 10%. That’s a pretty standard return and it’s in line with the industry average of 9.9%.
In the above chart we have measured Barrett Business Services’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Barrett Business Services.
What Can We Tell From Barrett Business Services’ ROCE Trend?
We’re delighted to see that Barrett Business Services is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it’s earning 10% which is a sight for sore eyes. Not only that, but the company is utilizing 95% more capital than before, but that’s to be expected from a company trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.One more thing to note, Barrett Business Services has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
Overall, Barrett Business Services gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 47% awarded to those who held the stock over the last five years, you could argue that these trends are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 2 warning signs for Barrett Business Services (1 is potentially serious) you should be aware of.
While Barrett Business Services isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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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