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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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Billington Holdings (LON:BILN) looks attractive right now, so lets see what the trend of returns can tell us.
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 Billington Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = UK£13m ÷ (UK£84m - UK£28m) (Based on the trailing twelve months to June 2024).
Thus, Billington Holdings has an ROCE of 23%. In absolute terms that's a very respectable return and compared to the Construction industry average of 19% it's pretty much on par.
See our latest analysis for Billington Holdings
Above you can see how the current ROCE for Billington Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Billington Holdings .
What Can We Tell From Billington Holdings' ROCE Trend?
In terms of Billington Holdings' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 116% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 33% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
Billington Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 115% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.