Yahoo Finance Stella-Jones (TSE:SJ) Might Have The Makings Of A Multi-Bagger
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Stella-Jones (TSE:SJ) so let's look a bit deeper.
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. The formula for this calculation on Stella-Jones is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CA$505m ÷ (CA$3.7b - CA$384m) (Based on the trailing twelve months to December 2023).
Therefore, Stella-Jones has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Forestry industry.
Check out our latest analysis for Stella-Jones
Above you can see how the current ROCE for Stella-Jones 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 Stella-Jones .
The Trend Of ROCE
The trends we've noticed at Stella-Jones are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 75%. So we're very much inspired by what we're seeing at Stella-Jones thanks to its ability to profitably reinvest capital.
Our Take On Stella-Jones' ROCE
In summary, it's great to see that Stella-Jones can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 90% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know about the risks facing Stella-Jones, we've discovered 1 warning sign that you should be aware of.
While Stella-Jones may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
