Why We Like The Returns At Installed Building Products (NYSE:IBP)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. And in light of that, the trends we're seeing at Installed Building Products' (NYSE:IBP) look very promising so lets take a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Installed Building Products, this is the formula:

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

0.23 = US$371m ÷ (US$2.0b - US$346m) (Based on the trailing twelve months to December 2023).

Therefore, Installed Building Products has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.

Check out our latest analysis for Installed Building Products

In the above chart we have measured Installed Building Products' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Installed Building Products .

What Does the ROCE Trend For Installed Building Products Tell Us?

Installed Building Products is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 150% more capital is being employed now too. So we're very much inspired by what we're seeing at Installed Building Products thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Installed Building Products has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 432% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Installed Building Products, you might be interested to know about the 2 warning signs that our analysis has discovered.

Installed Building Products is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.