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Northwest Pipe (NASDAQ:NWPX) Is Looking To Continue Growing Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Northwest Pipe (NASDAQ:NWPX) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Northwest Pipe is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.075 = US$25m ÷ (US$367m - US$35m) (Based on the trailing twelve months to March 2021).

Therefore, Northwest Pipe has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.8%.

Check out our latest analysis for Northwest Pipe

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roce

In the above chart we have measured Northwest Pipe's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Northwest Pipe.

What Can We Tell From Northwest Pipe's ROCE Trend?

We're delighted to see that Northwest Pipe is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 7.5% which is a sight for sore eyes. In addition to that, Northwest Pipe is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

In summary, it's great to see that Northwest Pipe has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Northwest Pipe can keep these trends up, it could have a bright future ahead.

While Northwest Pipe looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NWPX is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. 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 (at) simplywallst.com.

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