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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Bri-Chem (TSE:BRY), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Bri-Chem:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CA$2.4m ÷ (CA$59m - CA$30m) (Based on the trailing twelve months to June 2024).
Thus, Bri-Chem has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.
View our latest analysis for Bri-Chem
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Bri-Chem has performed in the past in other metrics, you can view this free graph of Bri-Chem's past earnings, revenue and cash flow.
The Trend Of ROCE
There is reason to be cautious about Bri-Chem, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Bri-Chem to turn into a multi-bagger.
On a separate but related note, it's important to know that Bri-Chem has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Bri-Chem's ROCE
In summary, it's unfortunate that Bri-Chem is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 233%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.