AZEK (NYSE:AZEK) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at AZEK (NYSE:AZEK) so let's look a bit deeper.

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 AZEK:

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

0.11 = US$227m ÷ (US$2.3b - US$214m) (Based on the trailing twelve months to June 2024).

Therefore, AZEK has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Building industry average it falls behind.

See 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 analyst report for AZEK .

What Can We Tell From AZEK's ROCE Trend?

We like the trends that we're seeing from AZEK. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at AZEK thanks to its ability to profitably reinvest capital.

Our Take On 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. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 22% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

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

While AZEK 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.