Returns Are Gaining Momentum At AZEK (NYSE:AZEK)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at AZEK (NYSE:AZEK) so let's look a bit deeper.
What Is 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 AZEK is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$172m ÷ (US$2.3b - US$198m) (Based on the trailing twelve months to December 2023).
Therefore, AZEK has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Building industry average of 16%.
View our latest analysis for AZEK
In the above chart we have measured AZEK'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 analyst report for AZEK .
What The Trend Of ROCE Can Tell Us
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.2%. The amount of capital employed has increased too, by 26%. So we're very much inspired by what we're seeing at AZEK thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that AZEK can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 14% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
If you'd like to know about the risks facing AZEK, we've discovered 2 warning signs that you should be aware of.
While AZEK 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.
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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.
