The Return Trends At Stella-Jones (TSE:SJ) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Stella-Jones (TSE:SJ) looks quite promising in regards to its trends of return on capital.

Understanding 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 Stella-Jones:

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

0.18 = CA$406m ÷ (CA$2.6b - CA$300m) (Based on the trailing twelve months to June 2021).

So, Stella-Jones has an ROCE of 18%. In isolation, that's a pretty standard return but against the Forestry industry average of 24%, it's not as good.

View our latest analysis for Stella-Jones

In the above chart we have measured Stella-Jones' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Stella-Jones' ROCE Trending?

We like the trends that we're seeing from Stella-Jones. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Stella-Jones' ROCE

In summary, it's great to see that Stella-Jones 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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.7% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One final note, you should learn about the 2 warning signs we've spotted with Stella-Jones (including 1 which is potentially serious) .

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.

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.

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