AZEK (NYSE:AZEK) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 AZEK's (NYSE:AZEK) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AZEK, this is the formula:

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

0.071 = US$143m ÷ (US$2.2b - US$170m) (Based on the trailing twelve months to September 2021).

Thus, AZEK has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Building industry average of 15%.

Check out our latest analysis for AZEK

Above you can see how the current ROCE for AZEK 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 AZEK's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 7.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. So we're very much inspired by what we're seeing at AZEK thanks to its ability to profitably reinvest capital.

What We Can Learn From AZEK's ROCE

To sum it up, AZEK has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 4.2% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, AZEK does come with some risks, and we've found 1 warning sign that you should be aware of.

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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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.