To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Brookfield Infrastructure (NYSE:BIPC) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Brookfield Infrastructure is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$879m ÷ (US$9.1b - US$2.8b) (Based on the trailing twelve months to March 2021).
So, Brookfield Infrastructure has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Gas Utilities industry average of 5.7% it's much better.
View our latest analysis for Brookfield Infrastructure
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Brookfield Infrastructure's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
You'd find it hard not to be impressed with the ROCE trend at Brookfield Infrastructure. The data shows that returns on capital have increased by 52% over the trailing three years. The company is now earning US$0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 34% less than it was three years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 31% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Brookfield Infrastructure's ROCE
In the end, Brookfield Infrastructure has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 76% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we found 3 warning signs for Brookfield Infrastructure (1 is significant) you should be aware of.
While Brookfield Infrastructure 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. 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.
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