Beacon Roofing Supply (NASDAQ:BECN) Is Doing The Right Things To Multiply Its Share Price

What are the early trends we should look for to identify a stock that could 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. Speaking of which, we noticed some great changes in Beacon Roofing Supply's (NASDAQ:BECN) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Beacon Roofing Supply, this is the formula:

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

0.15 = US$688m ÷ (US$6.6b - US$1.9b) (Based on the trailing twelve months to September 2023).

Therefore, Beacon Roofing Supply has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Trade Distributors industry.

See our latest analysis for Beacon Roofing Supply

In the above chart we have measured Beacon Roofing Supply'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 Beacon Roofing Supply here for free.

What The Trend Of ROCE Can Tell Us

Beacon Roofing Supply's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 186% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Beacon Roofing Supply's ROCE

To bring it all together, Beacon Roofing Supply has done well to increase the returns it's generating from its capital employed. And a remarkable 140% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Beacon Roofing Supply does have some risks though, and we've spotted 2 warning signs for Beacon Roofing Supply that you might be interested in.

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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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.