Will Northwest Pipe's (NASDAQ:NWPX) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Northwest Pipe (NASDAQ:NWPX) looks quite promising in regards to its trends of return on capital.

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

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

0.088 = US$29m ÷ (US$367m - US$38m) (Based on the trailing twelve months to September 2020).

So, Northwest Pipe has an ROCE of 8.8%. On its own, that's a low figure but it's around the 10% average generated by the Construction industry.

See our latest analysis for Northwest Pipe

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Northwest Pipe Tell Us?

We're delighted to see that Northwest Pipe is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Northwest Pipe is utilizing 29% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Northwest Pipe's ROCE

To the delight of most shareholders, Northwest Pipe has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

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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