If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Beijer Ref's (STO:BEIJ B) ROCE trend, we were pretty happy with 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. The formula for this calculation on Beijer Ref is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = kr1.3b ÷ (kr13b - kr4.5b) (Based on the trailing twelve months to June 2021).
So, Beijer Ref has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 97% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Beijer Ref has consistently earned this amount. 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.
Our Take On Beijer Ref's ROCE
In the end, Beijer Ref has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 722% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing Beijer Ref, we've discovered 3 warning signs that you should be aware of.
While Beijer Ref isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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