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. Speaking of which, we noticed some great changes in Babcock & Wilcox Enterprises' (NYSE:BW) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Babcock & Wilcox Enterprises:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$47m ÷ (US$837m - US$394m) (Based on the trailing twelve months to September 2023).
So, Babcock & Wilcox Enterprises has an ROCE of 10%. In isolation, that's a pretty standard return but against the Electrical industry average of 14%, it's not as good.
View our latest analysis for Babcock & Wilcox Enterprises
In the above chart we have measured Babcock & Wilcox Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Babcock & Wilcox Enterprises here for free.
How Are Returns Trending?
We're delighted to see that Babcock & Wilcox Enterprises is reaping rewards from its investments and has now broken into profitability. The company now earns 10% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Babcock & Wilcox Enterprises has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, Babcock & Wilcox Enterprises' current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Babcock & Wilcox Enterprises' ROCE
In summary, we're delighted to see that Babcock & Wilcox Enterprises has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
If you want to know some of the risks facing Babcock & Wilcox Enterprises we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.
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.