Stock Analysis

Quanex Building Products (NYSE:NX) Shareholders Will Want The ROCE Trajectory To Continue

NYSE:NX
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Quanex Building Products' (NYSE:NX) returns on capital, so let's have a look.

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 Quanex Building Products is:

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

0.15 = US$105m ÷ (US$831m - US$135m) (Based on the trailing twelve months to October 2023).

So, Quanex Building Products has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 16% generated by the Building industry.

View our latest analysis for Quanex Building Products

roce
NYSE:NX Return on Capital Employed February 28th 2024

In the above chart we have measured Quanex Building Products' 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 analyst report for Quanex Building Products .

So How Is Quanex Building Products' ROCE Trending?

Quanex Building Products has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 153% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To sum it up, Quanex Building Products is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 129% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Quanex Building Products does have some risks though, and we've spotted 1 warning sign for Quanex Building Products that you might be interested in.

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.