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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of BHP Group (ASX:BHP) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for BHP Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = US$34b ÷ (US$106b - US$21b) (Based on the trailing twelve months to December 2021).
Thus, BHP Group has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.8%.
In the above chart we have measured BHP Group's 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 BHP Group here for free.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at BHP Group. We found that the returns on capital employed over the last five years have risen by 444%. The company is now earning US$0.4 per dollar of capital employed. In regards to capital employed, BHP Group appears to been achieving more with less, since the business is using 21% less capital to run its operation. BHP Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In summary, it's great to see that BHP Group has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for BHP Group (of which 1 can't be ignored!) that you should know about.
BHP Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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