Northwest Pipe's (NASDAQ:NWPX) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Northwest Pipe (NASDAQ:NWPX) so let's look a bit deeper.

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

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

0.07 = US$38m ÷ (US$621m - US$83m) (Based on the trailing twelve months to March 2024).

So, Northwest Pipe has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

Check out our latest analysis for Northwest Pipe

Above you can see how the current ROCE for Northwest Pipe compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Northwest Pipe .

What Does the ROCE Trend For Northwest Pipe Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 126% more capital is being employed now too. So we're very much inspired by what we're seeing at Northwest Pipe thanks to its ability to profitably reinvest capital.

What We Can Learn From Northwest Pipe's ROCE

To sum it up, Northwest Pipe has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 55% return over the last five years. In light of that, we think it's worth looking further into this stock because if Northwest Pipe can keep these trends up, it could have a bright future ahead.

While Northwest Pipe looks impressive, no company is worth an infinite price. The intrinsic value infographic for NWPX helps visualize whether it is currently trading for a fair price.

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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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.

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