The Returns On Capital At Brickworks (ASX:BKW) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Brickworks (ASX:BKW), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Brickworks is:

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

0.01 = AU$58m ÷ (AU$6.0b - AU$293m) (Based on the trailing twelve months to January 2023).

Thus, Brickworks has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 3.5%.

View our latest analysis for Brickworks

In the above chart we have measured Brickworks' 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 Brickworks.

SWOT Analysis for Brickworks

What Can We Tell From Brickworks' ROCE Trend?

On the surface, the trend of ROCE at Brickworks doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.0% from 2.1% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Brickworks' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Brickworks. And the stock has followed suit returning a meaningful 93% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Brickworks that we think you should be aware of.

While Brickworks 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. 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.