What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Brookfield Infrastructure (NYSE:BIPC) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Brookfield Infrastructure, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$2.2b ÷ (US$24b – US$6.9b) (Based on the trailing twelve months to December 2024).
So, Brookfield Infrastructure has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 6.1% generated by the Gas Utilities industry.
Check out our latest analysis for Brookfield Infrastructure
In the above chart we have measured Brookfield Infrastructure’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Brookfield Infrastructure .
The Trend Of ROCE
The trends we’ve noticed at Brookfield Infrastructure are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 78% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 29% of its operations, which isn’t ideal. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line
To sum it up, Brookfield Infrastructure has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last three years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we found 2 warning signs for Brookfield Infrastructure (1 is a bit concerning) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.