Brookfield Infrastructure (NYSE:BIPC) Is Investing Its Capital With Increasing Efficiency
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Brookfield Infrastructure (NYSE:BIPC) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)
0.24 = US$1.1b ÷ (US$11b - US$6.7b) (Based on the trailing twelve months to March 2022).
Therefore, Brookfield Infrastructure has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Gas Utilities industry average of 5.3%.
Check out our latest analysis for Brookfield Infrastructure
In the above chart we have measured Brookfield Infrastructure's 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 The Trend Of ROCE Can Tell Us
We're pretty happy with how the ROCE has been trending at Brookfield Infrastructure. The data shows that returns on capital have increased by 160% over the trailing four years. The company is now earning US$0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 50% less capital than it was four years ago. Brookfield Infrastructure may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
What We Can Learn From Brookfield Infrastructure's ROCE
In a nutshell, we're pleased to see that Brookfield Infrastructure has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 4.5% to shareholders. So with that in mind, we think the stock deserves further research.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Brookfield Infrastructure (of which 3 don't sit too well with us!) that you should know about.
Brookfield Infrastructure is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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