What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Beijer Ref's (STO:BEIJ B) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Beijer Ref:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = kr1.4b ÷ (kr15b - kr4.9b) (Based on the trailing twelve months to December 2021).
Thus, Beijer Ref has an ROCE of 13%. In isolation, that's a pretty standard return but against the Trade Distributors industry average of 17%, it's not as good.
In the above chart we have measured Beijer Ref's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijer Ref here for free.
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 118% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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, Beijer Ref has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 480% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you'd like to know more about Beijer Ref, we've spotted 2 warning signs, and 1 of them is concerning.
While Beijer Ref 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.