Stock Analysis

Northwest Pipe (NASDAQ:NWPX) Might Have The Makings Of A Multi-Bagger

NasdaqGS:NWPX
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Northwest Pipe's (NASDAQ:NWPX) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Northwest Pipe:

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

0.075 = US$25m ÷ (US$367m - US$35m) (Based on the trailing twelve months to March 2021).

So, Northwest Pipe has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.5%.

View our latest analysis for Northwest Pipe

roce
NasdaqGS:NWPX Return on Capital Employed May 17th 2021

In the above chart we have measured Northwest Pipe's 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 Northwest Pipe.

The Trend Of ROCE

The fact that Northwest Pipe is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.5% which is a sight for sore eyes. In addition to that, Northwest Pipe is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

In summary, it's great to see that Northwest Pipe has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 259% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

While Northwest Pipe 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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Valuation is complex, but we're here to simplify it.

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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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