Some Investors May Be Worried About Brickworks' (ASX:BKW) Returns On Capital

Simply Wall St · 09/28 22:56

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Brickworks (ASX:BKW), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Brickworks is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0037 = AU$20m ÷ (AU$5.8b - AU$288m) (Based on the trailing twelve months to July 2024).

Thus, Brickworks has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.6%.

Check out our latest analysis for Brickworks

roce
ASX:BKW Return on Capital Employed September 28th 2024

In the above chart we have measured Brickworks' 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 Brickworks for free.

What Does the ROCE Trend For Brickworks Tell Us?

In terms of Brickworks' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 2.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Brickworks' ROCE

Bringing it all together, while we're somewhat encouraged by Brickworks' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 89% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

While Brickworks doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for BKW on our platform.

While Brickworks 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.