In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at BMTC Group (TSE:GBT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 BMTC Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = CA$20m ÷ (CA$641m - CA$105m) (Based on the trailing twelve months to October 2024).
So, BMTC Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.
Check out our latest analysis for BMTC Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for BMTC Group's ROCE against it's prior returns. If you'd like to look at how BMTC Group has performed in the past in other metrics, you can view this free graph of BMTC Group's past earnings, revenue and cash flow.
So How Is BMTC Group's ROCE Trending?
When we looked at the ROCE trend at BMTC Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, BMTC Group has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
To conclude, we've found that BMTC Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.