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. Although, when we looked at Brickworks (ASX:BKW), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Brickworks:

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

0.01 = AU$58m ÷ (AU$6.0b - AU$293m) (Based on the trailing twelve months to January 2023).

Thus, Brickworks has an ROCE of 1.0%.  Ultimately, that's a low return and it under-performs the Basic Materials industry average of 3.5%.

View our latest analysis for Brickworks  roce

Above you can see how the current ROCE for Brickworks compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our freereport for Brickworks.

What Can We Tell From Brickworks' ROCE Trend?

On the surface, the trend of ROCE at Brickworks doesn't inspire confidence. To be more specific, ROCE has fallen from 2.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Brickworks' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Brickworks is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 89% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Brickworks, you might be interested to know about the 1 warning signthat our analysis has discovered.

For those who like to invest in solid companies, check out this freelist of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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