Will The ROCE Trend At Quanex Building Products (NYSE:NX) Continue?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Quanex Building Products (NYSE:NX) and its trend of ROCE, we really liked what we saw.

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 Quanex Building Products:

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

0.10 = US$56m ÷ (US$692m - US$130m) (Based on the trailing twelve months to October 2020).

Thus, Quanex Building Products has an ROCE of 10.0%. Ultimately, that's a low return and it under-performs the Building industry average of 14%.

See our latest analysis for Quanex Building Products

Above you can see how the current ROCE for Quanex Building Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Quanex Building Products here for free.

What Can We Tell From Quanex Building Products' ROCE Trend?

Quanex Building Products' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 94% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

As discussed above, Quanex Building Products appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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.

While Quanex Building Products isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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