Barrett Business Services (NASDAQ:BBSI) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Barrett Business Services (NASDAQ:BBSI) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Barrett Business Services, this is the formula:

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

0.16 = US$56m ÷ (US$689m - US$333m) (Based on the trailing twelve months to June 2024).

Thus, Barrett Business Services has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 14%.

Check out our latest analysis for Barrett Business Services

Above you can see how the current ROCE for Barrett Business Services 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 Barrett Business Services .

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Barrett Business Services. The data shows that returns on capital have increased by 57% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 27% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a separate but related note, it's important to know that Barrett Business Services has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's great to see that Barrett Business Services has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 69% return over the last five years. In light of that, we think it's worth looking further into this stock because if Barrett Business Services can keep these trends up, it could have a bright future ahead.

Barrett Business Services does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Barrett Business Services 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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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.