Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Barrett Business Services' (NASDAQ:BBSI) returns on capital, so let's have a look.

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. To calculate this metric for Barrett Business Services, this is the formula:

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

0.16 = US$56m ÷ (US$689m - US$333m) (Based on the trailing twelve months to June 2024).

Therefore, Barrett Business Services has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Professional Services industry.

See our latest analysis for Barrett Business Services

In the above chart we have measured Barrett Business Services' 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 Barrett Business Services .

What Can We Tell From Barrett Business Services' ROCE Trend?

Barrett Business Services has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 57%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Barrett Business Services appears to been achieving more with less, since the business is using 27% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Another thing to note, Barrett Business Services has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.