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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at Baby Bunting Group (ASX:BBN) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Baby Bunting Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = AU$17m ÷ (AU$332m - AU$91m) (Based on the trailing twelve months to June 2024).
Therefore, Baby Bunting Group has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 17%.
See our latest analysis for Baby Bunting Group
Above you can see how the current ROCE for Baby Bunting Group 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 Baby Bunting Group for free.
What Does the ROCE Trend For Baby Bunting Group Tell Us?
On the surface, the trend of ROCE at Baby Bunting Group doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Baby Bunting Group's ROCE
To conclude, we've found that Baby Bunting Group is reinvesting in the business, but returns have been falling. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you'd like to know about the risks facing Baby Bunting Group, we've discovered 1 warning sign that you should be aware of.