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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. That's why when we briefly looked at BWX Technologies' (NYSE:BWXT) ROCE trend, we were pretty happy with what we saw.
What is 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. To calculate this metric for BWX Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$390m ÷ (US$2.6b - US$409m) (Based on the trailing twelve months to March 2022).
So, BWX Technologies has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Aerospace & Defense industry.
In the above chart we have measured BWX Technologies' 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 BWX Technologies.
What Does the ROCE Trend For BWX Technologies Tell Us?
While the returns on capital are good, they haven't moved much. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On BWX Technologies' ROCE
The main thing to remember is that BWX Technologies has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 20% over the last five years for shareholders who have owned the stock in this period. So to determine if BWX Technologies is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
One more thing to note, we've identified 1 warning sign with BWX Technologies and understanding it should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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