Investors Could Be Concerned With Construction Partners' (NASDAQ:ROAD) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Construction Partners (NASDAQ:ROAD), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Construction Partners is:

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

0.052 = US$49m ÷ (US$1.2b - US$241m) (Based on the trailing twelve months to June 2023).

So, Construction Partners has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 11%.

Check out our latest analysis for Construction Partners

In the above chart we have measured Construction Partners' 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 Construction Partners.

How Are Returns Trending?

When we looked at the ROCE trend at Construction Partners, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Construction Partners' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Construction Partners is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 282% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Construction Partners, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While Construction Partners may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.