Be Wary Of Boyd Group Services (TSE:BYD) And Its Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Boyd Group Services (TSE:BYD), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Boyd Group Services:

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

0.029 = US$49m ÷ (US$2.1b - US$393m) (Based on the trailing twelve months to March 2022).

Therefore, Boyd Group Services has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 6.1%.

View our latest analysis for Boyd Group Services

Above you can see how the current ROCE for Boyd Group Services 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 Boyd Group Services here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Boyd Group Services doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 2.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Boyd Group Services' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Boyd Group Services is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 52% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 3 warning signs we've spotted with Boyd Group Services (including 1 which makes us a bit uncomfortable) .

While Boyd Group 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. 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.