What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Beacon Lighting Group's (ASX:BLX) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Beacon Lighting Group:

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

0.19 = AU$51m ÷ (AU$367m - AU$94m) (Based on the trailing twelve months to June 2024).

Therefore, Beacon Lighting Group has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 17% generated by the Specialty Retail industry.

View our latest analysis for Beacon Lighting Group

Above you can see how the current ROCE for Beacon Lighting Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beacon Lighting Group .

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 156% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Beacon Lighting Group's ROCE

The main thing to remember is that Beacon Lighting Group has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 188% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

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