Northwest Pipe (NASDAQ:NWPX) Shareholders Will Want The ROCE Trajectory To Continue
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Northwest Pipe (NASDAQ:NWPX) so let's look a bit deeper.
What Is 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. Analysts use this formula to calculate it for Northwest Pipe:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = US$45m ÷ (US$601m - US$91m) (Based on the trailing twelve months to December 2022).
Therefore, Northwest Pipe has an ROCE of 8.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.8%.
See our latest analysis for Northwest Pipe
Above you can see how the current ROCE for Northwest Pipe 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 free report for Northwest Pipe.
So How Is Northwest Pipe's ROCE Trending?
The fact that Northwest Pipe is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 8.8% which is a sight for sore eyes. In addition to that, Northwest Pipe is employing 139% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
Long story short, we're delighted to see that Northwest Pipe's reinvestment activities have paid off and the company is now profitable. And with a respectable 63% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Northwest Pipe can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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