Yahoo Finance Investors Should Be Encouraged By Installed Building Products' (NYSE:IBP) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Installed Building Products (NYSE:IBP) looks great, so lets see what the trend can tell us.
Understanding 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 Installed Building Products is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$371m ÷ (US$2.0b - US$346m) (Based on the trailing twelve months to December 2023).
So, Installed Building Products has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.
Check out our latest analysis for Installed Building Products
In the above chart we have measured Installed Building Products' 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 Installed Building Products .
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Installed Building Products. The data shows that returns on capital have increased substantially over the last five years to 23%. The amount of capital employed has increased too, by 150%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On Installed Building Products' ROCE
In summary, it's great to see that Installed Building Products 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to continue researching Installed Building Products, you might be interested to know about the 2 warning signs that our analysis has discovered.
Installed Building Products is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
