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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Bright Horizons Family Solutions (NYSE:BFAM), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on Bright Horizons Family Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$247m ÷ (US$3.9b - US$779m) (Based on the trailing twelve months to December 2024).
Thus, Bright Horizons Family Solutions has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 9.4%.
See our latest analysis for Bright Horizons Family Solutions
In the above chart we have measured Bright Horizons Family Solutions' 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 Bright Horizons Family Solutions for free.
What Does the ROCE Trend For Bright Horizons Family Solutions Tell Us?
Things have been pretty stable at Bright Horizons Family Solutions, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Bright Horizons Family Solutions in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Key Takeaway
We can conclude that in regards to Bright Horizons Family Solutions' returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Bright Horizons Family Solutions has the makings of a multi-bagger.
On a final note, we've found 2 warning signs for Bright Horizons Family Solutions that we think you should be aware of.