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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at BlueLinx Holdings (NYSE:BXC) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 BlueLinx Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$113m ÷ (US$1.6b - US$237m) (Based on the trailing twelve months to June 2024).
So, BlueLinx Holdings has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.
View our latest analysis for BlueLinx Holdings
Above you can see how the current ROCE for BlueLinx Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for BlueLinx Holdings .
So How Is BlueLinx Holdings' ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.4%. The amount of capital employed has increased too, by 57%. So we're very much inspired by what we're seeing at BlueLinx Holdings thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that BlueLinx Holdings is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if BlueLinx Holdings can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing BlueLinx Holdings that you might find interesting.