To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Quanex Building Products (NYSE:NX) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Quanex Building Products is:

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

0.12 = US$86m ÷ (US$872m - US$128m) (Based on the trailing twelve months to July 2024).

Therefore, Quanex Building Products has an ROCE of 12%. In isolation, that's a pretty standard return but against the Building industry average of 16%, it's not as good.

View 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Quanex Building Products .

What Does the ROCE Trend For Quanex Building Products Tell Us?

Investors would be pleased with what's happening at Quanex Building Products. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 25% more capital is being employed now too. So we're very much inspired by what we're seeing at Quanex Building Products thanks to its ability to profitably reinvest capital.

Our Take On Quanex Building Products' ROCE

In summary, it's great to see that Quanex Building Products can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.