Return on Capital at Barrett Business Services (NASDAQ: BBSI) Paint a worrying picture


What are the first trends to look for to identify a security that could increase in value over the long term? First, we would like to identify a growth return on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that it is a company that reinvests profits at increasing rates of return. Having said that, from a first glance at Barrett Business Services (NASDAQ: BBSI) We’re not jumping out of our chairs to see how the returns move, but take a closer look.

What is Return on Capital Employed (ROCE)?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Barrett Business Services, here is the formula:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.075 = $ 36 million ÷ ($ 843 million – $ 370 million) (Based on the last twelve months up to March 2021).

So, Barrett Business Services has a ROCE of 7.5%. In absolute terms, that’s a low return and it also underperforms the professional services industry average by 10%.

NasdaqGS: BBSI Return on Capital Employed May 30, 2021

Above you can see how Barrett Business Services’ current ROCE compares to its past returns on capital, but you can’t say more about the past. If you are interested, you can view analyst forecasts in our free business analyst forecast report.

What does the ROCE trend tell us for Barrett’s business services?

When we looked at the ROCE trend at Barrett Business Services, we didn’t gain much confidence. To be more precise, ROCE has increased by 13% over the past five years. However, it appears Barrett Business Services is reinvesting for long-term growth, as while capital employed has increased, the company’s sales haven’t changed much in the past 12 months. It may take some time for the business to begin to see a change in the benefits of these investments.

Similarly, Barrett Business Services reduced its current liabilities to 44% of total assets. This could partly explain why the ROCE has fallen. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors now finance less of its operations. Since the company essentially funds more of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE. Keep in mind that 44% is still quite high, so these risks are still somewhat prevalent.

What we can learn from Barrett Business Services’ ROCE

To conclude, we found that Barrett Business Services is reinvesting in the business, but the returns are declining. Investors must think there are better things to come because the stock has kicked it out of the park, offering a 115% gain to shareholders who have owned in the past five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath that this is a multi-bagger in the future.

If you are interested in learning more about Barrett Business Services, we have spotted 2 warning signs, and 1 of them makes us a little uncomfortable.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.

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