What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Quanex Building Products (NYSE:NX) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. 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).

Thus, 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.

Above you can see how the current ROCE for Quanex Building Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Quanex Building Products for free.

What Can We Tell From Quanex Building Products' ROCE Trend?

The trends we've noticed at Quanex Building Products are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 25%. So we're very much inspired by what we're seeing at Quanex Building Products thanks to its ability to profitably reinvest capital.

The Bottom Line 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 with a respectable 64% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Quanex Building Products can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Quanex Building Products, we've discovered 1 warning sign that you should be aware of.

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

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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.