Yahoo Finance Why You Should Care About Trex Company's (NYSE:TREX) Strong Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, the ROCE of Trex Company (NYSE:TREX) looks attractive right now, so lets see what the trend of returns can tell us.
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. The formula for this calculation on Trex Company is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = US$338m ÷ (US$1.3b - US$369m) (Based on the trailing twelve months to March 2024).
Therefore, Trex Company has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
Check out our latest analysis for Trex Company
Above you can see how the current ROCE for Trex Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Trex Company for free.
So How Is Trex Company's ROCE Trending?
It's hard not to be impressed by Trex Company's returns on capital. The company has employed 115% more capital in the last five years, and the returns on that capital have remained stable at 37%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Trex Company can keep this up, we'd be very optimistic about its future.
The Bottom Line
Trex Company has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 89% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Like most companies, Trex Company does come with some risks, and we've found 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
