UFP Industries (NASDAQ:UFPI) Knows How To Allocate Capital Effectively

By
Simply Wall St
Published
April 19, 2022
NasdaqGS:UFPI
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in UFP Industries' (NASDAQ:UFPI) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for UFP Industries:

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

0.29 = US$726m ÷ (US$3.2b - US$776m) (Based on the trailing twelve months to December 2021).

So, UFP Industries has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

View our latest analysis for UFP Industries

roce
NasdaqGS:UFPI Return on Capital Employed April 19th 2022

Above you can see how the current ROCE for UFP Industries 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 report on analyst forecasts for the company.

What Can We Tell From UFP Industries' ROCE Trend?

The trends we've noticed at UFP Industries are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. The amount of capital employed has increased too, by 142%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On UFP Industries' ROCE

All in all, it's terrific to see that UFP Industries is reaping the rewards from prior investments and is growing its capital base. And a remarkable 139% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 1 warning sign for UFP Industries that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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