If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, UFP Industries (NASDAQ:UFPI) looks quite promising in regards to its trends of return on capital.
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 UFP Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = US$275m ÷ (US$2.1b – US$435m) (Based on the trailing twelve months to June 2020).
So, UFP Industries has an ROCE of 17%. In absolute terms, that’s a satisfactory return, but compared to the Building industry average of 13% it’s much better.
In the above chart we have measured UFP Industries’ 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 UFP Industries here for free.
The Trend Of ROCE
We like the trends that we’re seeing from UFP Industries. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 79%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
All in all, it’s terrific to see that UFP Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 199% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if UFP Industries can keep these trends up, it could have a bright future ahead.
If you want to continue researching UFP Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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