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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Barrett Business Services (NASDAQ:BBSI), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Barrett Business Services:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$39m ÷ (US$809m - US$357m) (Based on the trailing twelve months to September 2021).
Thus, Barrett Business Services has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 11%.
Check out our latest analysis for Barrett Business Services
In the above chart we have measured Barrett Business Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Barrett Business Services.
How Are Returns Trending?
When we looked at the ROCE trend at Barrett Business Services, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.7% from 11% five years ago. However it looks like Barrett Business Services might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
On a side note, Barrett Business Services' current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Barrett Business Services' ROCE
In summary, Barrett Business Services is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 55% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.