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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Trex Company's (NYSE:TREX) trend of ROCE, we really liked what we saw.

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

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 Trex Company:

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

0.31 = US$318m ÷ (US$1.3b - US$251m) (Based on the trailing twelve months to September 2024).

Thus, Trex Company has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Building industry average of 15%.

Check out our latest analysis for Trex Company

In the above chart we have measured Trex Company's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Trex Company for free.

What Can We Tell From Trex Company's ROCE Trend?

Trex Company deserves to be commended in regards to it's returns. The company has consistently earned 31% for the last five years, and the capital employed within the business has risen 110% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In short, we'd argue Trex Company has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 32% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Trex Company that you might find interesting.

Trex Company is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.