What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Build-A-Bear Workshop's (NYSE:BBW) look very promising so lets take a look.

What Is 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. Analysts use this formula to calculate it for Build-A-Bear Workshop:

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

0.31 = US$62m ÷ (US$279m - US$80m) (Based on the trailing twelve months to August 2024).

Therefore, Build-A-Bear Workshop has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

View our latest analysis for Build-A-Bear Workshop

Above you can see how the current ROCE for Build-A-Bear Workshop 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 Build-A-Bear Workshop for free.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Build-A-Bear Workshop has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 31%, which is always encouraging. While returns have increased, the amount of capital employed by Build-A-Bear Workshop has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On Build-A-Bear Workshop's ROCE

In summary, we're delighted to see that Build-A-Bear Workshop has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 1,342% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Build-A-Bear Workshop can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Build-A-Bear Workshop (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.