Northwest Pipe (NASDAQ:NWPX) does what it takes to multiply its stock price
If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So when we looked northwest pipe (NASDAQ:NWPX) and its ROCE trend, we really liked what we saw.
Understanding 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. To calculate this metric for Northwest Pipe, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.066 = $33 million ÷ ($587 million – $92 million) (Based on the last twelve months to June 2022).
Therefore, Northwest Pipe has an ROI of 6.6%. In absolute terms, this is a weak return, but it is around the construction industry average of 8.0%.
In the chart above, we’ve measured Northwest Pipe’s past ROI against past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering Northwest Pipe here for free.
The ROCE trend
We are pleased to see that Northwest Pipe is reaping the rewards of its investments and is now generating pre-tax profits. The company was generating losses five years ago, but is now earning 6.6%, which is a feast for the eyes. Not only that, but the company is using 129% more capital than before, but that’s to be expected of a company trying to become profitable. This may indicate that there are many opportunities to invest capital internally and at ever-increasing rates, two common characteristics of a multi-bagger.
In short, we are pleased to see that Northwest Pipe’s reinvestment activities have paid off and that the company is now profitable. Given that the stock has returned a solid 74% to shareholders over the past five years, it’s fair to say that investors are starting to recognize these changes. That being said, we still think the promising fundamentals mean the company merits further due diligence.
Before drawing any conclusions, we need to know what value we get for the current stock price. This is where you can view our FREE Intrinsic Value Estimate which compares the stock price and the estimated value.
Although Northwest Pipe isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating more than 25% return on equity. look at this free list here.
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