There Are Reasons To Feel Uneasy About Bright Horizons Family Solutions' (NYSE:BFAM) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Bright Horizons Family Solutions (NYSE:BFAM), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Bright Horizons Family Solutions, this is the formula:

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

0.034 = US$104m ÷ (US$3.8b - US$788m) (Based on the trailing twelve months to March 2023).

So, Bright Horizons Family Solutions has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 6.8%.

View our latest analysis for Bright Horizons Family Solutions

In the above chart we have measured Bright Horizons Family Solutions' 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 report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Bright Horizons Family Solutions' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Bright Horizons Family Solutions' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Bright Horizons Family Solutions is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 20% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 3 warning signs for Bright Horizons Family Solutions (1 shouldn't be ignored) you should be aware of.

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.