Returns On Capital Are A Standout For Birman Wood & Hardware (TLV:BIRM)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. And in light of that, the trends we're seeing at Birman Wood & Hardware's (TLV:BIRM) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Birman Wood & Hardware is:

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

0.37 = ₪71m ÷ (₪484m - ₪290m) (Based on the trailing twelve months to June 2022).

So, Birman Wood & Hardware has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Building industry average of 15%.

View our latest analysis for Birman Wood & Hardware

Historical performance is a great place to start when researching a stock so above you can see the gauge for Birman Wood & Hardware's ROCE against it's prior returns. If you'd like to look at how Birman Wood & Hardware has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Birman Wood & Hardware's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 211% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 60% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

As discussed above, Birman Wood & Hardware appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 94% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Birman Wood & Hardware can keep these trends up, it could have a bright future ahead.

Birman Wood & Hardware does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are significant...

Birman Wood & Hardware is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.