Shareholders Would Enjoy A Repeat Of Birman Wood & Hardware's (TLV:BIRM) Recent Growth In Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Birman Wood & Hardware (TLV:BIRM) we really liked what we saw.

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. To calculate this metric for Birman Wood & Hardware, this is the formula:

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

0.40 = ₪76m ÷ (₪427m - ₪235m) (Based on the trailing twelve months to December 2021).

Therefore, Birman Wood & Hardware has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Building industry average of 16%.

Check out 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're interested in investigating Birman Wood & Hardware's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Birman Wood & Hardware has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 215% 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 55% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Birman Wood & Hardware's ROCE

To bring it all together, Birman Wood & Hardware has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Birman Wood & Hardware does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are concerning...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.