Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Brickworks (ASX:BKW) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Brickworks is:

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

0.0056 = AU$33m ÷ (AU$6.1b - AU$305m) (Based on the trailing twelve months to July 2023).

Thus, Brickworks has an ROCE of 0.6%.  In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 5.6%.

See 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, you can check out the forecasts from the analysts covering Brickworks here  for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Brickworks doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.6% from 2.1% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Brickworks' ROCE

Bringing it all together, while we're somewhat encouraged by Brickworks' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 98% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.



Brickworks does have some risks, we noticed  3 warning signs  (and 1 which makes us a bit uncomfortable)  we think you should know about.

While Brickworks isn't earning the highest return, check out this freelist 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. 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.