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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Quanex Building Products (NYSE:NX) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Quanex Building Products:

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

0.14 = US$78m ÷ (US$716m - US$136m) (Based on the trailing twelve months to April 2021).

Therefore, Quanex Building Products has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 13%.

Check out our latest analysis for Quanex Building Products

In the above chart we have measured Quanex Building Products' 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 Quanex Building Products here for free.

So How Is Quanex Building Products' ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Quanex Building Products. The figures show that over the last five years, returns on capital have grown by 170%. The company is now earning US$0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

In summary, it's great to see that Quanex Building Products has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to continue researching Quanex Building Products, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Quanex Building Products 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.

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.

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