Returns On Capital At Bright Horizons Family Solutions (NYSE:BFAM) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Bright Horizons Family Solutions (NYSE:BFAM) and its ROCE trend, we weren't exactly thrilled.

We've discovered 2 warning signs about Bright Horizons Family Solutions. View them for free.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Bright Horizons Family Solutions is:

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

0.091 = US$279m ÷ (US$3.9b - US$779m) (Based on the trailing twelve months to December 2024).

Thus, Bright Horizons Family Solutions has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 9.5%.

See our latest analysis for Bright Horizons Family Solutions

Above you can see how the current ROCE for Bright Horizons Family Solutions 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 Bright Horizons Family Solutions for free.

So How Is Bright Horizons Family Solutions' ROCE Trending?

Over the past five years, Bright Horizons Family Solutions' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Bright Horizons Family Solutions in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

In Conclusion...

In summary, Bright Horizons Family Solutions isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 5.4% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 2 warning signs with Bright Horizons Family Solutions and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.