Returns On Capital Signal Tricky Times Ahead For Construction Partners (NASDAQ:ROAD)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at Construction Partners (NASDAQ:ROAD), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Construction Partners is:

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

0.033 = US$27m ÷ (US$1.0b - US$204m) (Based on the trailing twelve months to June 2022).

So, Construction Partners has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.9%.

Check out our latest analysis for Construction Partners

roce

In the above chart we have measured Construction Partners' 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 Construction Partners here for free.

How Are Returns Trending?

In terms of Construction Partners' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.3% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Construction Partners has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Construction Partners' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Construction Partners. Furthermore the stock has climbed 72% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Construction Partners does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Construction Partners isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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