We Like These Underlying Return On Capital Trends At Balfour Beatty (LON:BBY)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Balfour Beatty (LON:BBY) and its trend of ROCE, we really liked what we saw.

What Is 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. The formula for this calculation on Balfour Beatty is:

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

0.011 = UK£28m ÷ (UK£5.1b - UK£2.6b) (Based on the trailing twelve months to July 2022).

Thus, Balfour Beatty has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.0%.

See our latest analysis for Balfour Beatty

In the above chart we have measured Balfour Beatty's 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.

What Can We Tell From Balfour Beatty's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Balfour Beatty promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 116% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a separate but related note, it's important to know that Balfour Beatty has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Balfour Beatty's ROCE

To bring it all together, Balfour Beatty has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we found 3 warning signs for Balfour Beatty (1 makes us a bit uncomfortable) 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.