Big River Industries (ASX:BRI) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Big River Industries' (ASX:BRI) look very promising so lets take a look.

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. To calculate this metric for Big River Industries, this is the formula:

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

0.20 = AU$35m ÷ (AU$261m - AU$90m) (Based on the trailing twelve months to June 2022).

Therefore, Big River Industries has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Forestry industry average of 10%.

View our latest analysis for Big River Industries

Above you can see how the current ROCE for Big River Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Big River Industries here for free.

What Can We Tell From Big River Industries' ROCE Trend?

Investors would be pleased with what's happening at Big River Industries. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 168%. So we're very much inspired by what we're seeing at Big River Industries thanks to its ability to profitably reinvest capital.

The Bottom Line On Big River Industries' ROCE

In summary, it's great to see that Big River Industries 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 stock has returned a solid 44% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Big River Industries, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.