Some Investors May Be Worried About Badger Infrastructure Solutions' (TSE:BDGI) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Badger Infrastructure Solutions (TSE:BDGI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Badger Infrastructure Solutions is:

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

0.13 = US$62m ÷ (US$633m - US$138m) (Based on the trailing twelve months to December 2023).

Thus, Badger Infrastructure Solutions has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Construction industry.

See our latest analysis for Badger Infrastructure Solutions

Above you can see how the current ROCE for Badger Infrastructure Solutions 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 analyst report for Badger Infrastructure Solutions .

So How Is Badger Infrastructure Solutions' ROCE Trending?

When we looked at the ROCE trend at Badger Infrastructure Solutions, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Badger Infrastructure Solutions. These trends are starting to be recognized by investors since the stock has delivered a 14% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Badger Infrastructure Solutions does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.