If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of BlueLinx Holdings (NYSE:BXC) we really liked what we saw.
Understanding 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. Analysts use this formula to calculate it for BlueLinx Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.43 = US$521m ÷ (US$1.5b - US$336m) (Based on the trailing twelve months to April 2022).
Thus, BlueLinx Holdings has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 14%.
In the above chart we have measured BlueLinx Holdings' 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.
What Can We Tell From BlueLinx Holdings' ROCE Trend?
BlueLinx Holdings is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 43%. Basically the business is earning more per dollar of capital invested and in addition to that, 235% more capital is being employed now too. So we're very much inspired by what we're seeing at BlueLinx Holdings thanks to its ability to profitably reinvest capital.
What We Can Learn From BlueLinx Holdings' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what BlueLinx Holdings has. Since the stock has returned a staggering 745% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for BlueLinx Holdings (of which 2 can't be ignored!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.