Yahoo Finance Bright Horizons Family Solutions (NYSE:BFAM) Will Want To Turn Around Its Return Trends
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Bright Horizons Family Solutions (NYSE:BFAM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for Bright Horizons Family Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$147m ÷ (US$3.7b - US$690m) (Based on the trailing twelve months to September 2022).
Thus, Bright Horizons Family Solutions has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.1%.
View our latest analysis for Bright Horizons Family Solutions
Above you can see how the current ROCE for Bright Horizons Family Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Bright Horizons Family Solutions Tell Us?
In terms of Bright Horizons Family Solutions' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.9% from 10.0% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
While returns have fallen for Bright Horizons Family Solutions in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 28% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we've found 1 warning sign for Bright Horizons Family Solutions that we think you should be aware of.
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.
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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.
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