What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Biglari Holdings (NYSE:BH.A) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Biglari Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$34m ÷ (US$934m - US$142m) (Based on the trailing twelve months to June 2021).
Thus, Biglari Holdings has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Biglari Holdings' ROCE against it's prior returns. If you're interested in investigating Biglari Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Biglari Holdings' ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 28%. The company is now earning US$0.04 per dollar of capital employed. In regards to capital employed, Biglari Holdings appears to been achieving more with less, since the business is using 20% less capital to run its operation. Biglari Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In summary, it's great to see that Biglari Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 7.7% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you'd like to know more about Biglari Holdings, we've spotted 2 warning signs, and 1 of them is concerning.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.