If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Stella-Jones' (TSE:SJ) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Stella-Jones:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CA$244m ÷ (CA$2.6b - CA$249m) (Based on the trailing twelve months to March 2020).
Therefore, Stella-Jones has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 8.1% it's much better.
View our latest analysis for Stella-Jones
Above you can see how the current ROCE for Stella-Jones 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 Stella-Jones here for free.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 75% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Stella-Jones has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
In the end, Stella-Jones has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 12%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
Stella-Jones does have some risks though, and we've spotted 1 warning sign for Stella-Jones that you might be interested in.
While Stella-Jones may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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