Be Wary Of Boyd Group Services (TSE:BYD) And Its Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Boyd Group Services (TSE:BYD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Boyd Group Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$153m ÷ (US$2.3b - US$474m) (Based on the trailing twelve months to September 2023).
Therefore, Boyd Group Services has an ROCE of 8.4%. On its own, that's a low figure but it's around the 8.6% average generated by the Commercial Services industry.
View our latest analysis for Boyd Group Services
Above you can see how the current ROCE for Boyd Group Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Boyd Group Services here for free.
What Can We Tell From Boyd Group Services' ROCE Trend?
On the surface, the trend of ROCE at Boyd Group Services doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.4%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Boyd Group Services' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Boyd Group Services is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 136% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
One more thing, we've spotted 1 warning sign facing Boyd Group Services that you might find interesting.
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.
