What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Concrete Pumping Holdings (NASDAQ:BBCP), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Concrete Pumping Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$30m ÷ (US$766m - US$40m) (Based on the trailing twelve months to January 2021).
Thus, Concrete Pumping Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.5%.
In the above chart we have measured Concrete Pumping Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Concrete Pumping Holdings.
What The Trend Of ROCE Can Tell Us
In terms of Concrete Pumping Holdings' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 15%, but since then they've fallen to 4.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Concrete Pumping Holdings has decreased its current liabilities to 5.3% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Concrete Pumping Holdings' ROCE
To conclude, we've found that Concrete Pumping Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 17% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Concrete Pumping Holdings and understanding it should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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What are the risks and opportunities for Concrete Pumping Holdings?
Price-To-Earnings ratio (16.7x) is below the Construction industry average (24x)
Earnings are forecast to grow 12.27% per year
Became profitable this year
Interest payments are not well covered by earnings
This article by Simply Wall St is general in nature. 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.
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