Brickworks (ASX: BKW) hopes to turn its returns into capital

What are the early trends to look for to identify a stock that could multiply in value over the long term? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the quantity capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. However, after investigating Brickworks (ASX:BKW), we don’t think current trends fit the mold of a multi-bagger.

What is return on capital employed (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Brickworks:

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

0.0057 = AU$22 million ÷ (AU$4.0 billion – AU$268 million) (Based on the last twelve months to July 2021).

Therefore, Brickworks has a ROCE of 0.6%. Ultimately, that’s a weak return, and it’s below the basic materials industry average of 8.1%.

See our latest analysis for Brickworks

ASX: BKW Return on capital employed 14 January 2022

In the chart above, we measured Brickworks’ past ROCE against its past performance, but the future is arguably more important. If you want, you can check out forecasts from analysts covering Brickworks here for free.

What is the return trend?

In terms of historic Brickworks ROCE movements, the trend is not fantastic. About five years ago, the return on capital was 2.5%, but since then it has fallen to 0.6%. On the other hand, the company has employed more capital without a corresponding improvement in sales over the past year, which might suggest that these investments are longer-term investments. It’s worth keeping an eye on the company’s earnings going forward to see if those investments end up contributing to the bottom line.

The essential

In summary, while we are somewhat encouraged by Brickworks’ reinvestment in its own business, we are aware that returns are diminishing. Investors must be thinking there are better things to come because the stock knocked it out of the park, delivering a 118% gain to shareholders who have held it over the past five years. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is a multi-bagger going forward.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for the brickyards (including 1 not to be overlooked!) that you should know.

Although Brickworks isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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