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Boyd Group Services (TSE:BYD) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Boyd Group Services (TSE:BYD), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Boyd Group Services is:

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

0.052 = US$84m ÷ (US$2.0b - US$377m) (Based on the trailing twelve months to September 2021).

So, Boyd Group Services has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 6.1%.

Check out our latest analysis for Boyd Group Services

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In the above chart we have measured Boyd Group Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Boyd Group Services.

The Trend Of ROCE

On the surface, the trend of ROCE at Boyd Group Services doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 5.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Boyd Group Services' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Boyd Group Services. Furthermore the stock has climbed 84% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with Boyd Group Services (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Boyd Group Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.