To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 looked at the ROCE trend of Brilliant (HMSE:BAG) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Brilliant is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = €3.4m ÷ (€33m - €21m) (Based on the trailing twelve months to December 2023).
Thus, Brilliant has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 7.8%.
See our latest analysis for Brilliant
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 Brilliant has performed in the past in other metrics, you can view this free graph of Brilliant's past earnings, revenue and cash flow.
The Trend Of ROCE
Like most people, we're pleased that Brilliant is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 30% on their capital employed. In regards to capital employed, Brilliant is using 46% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 66% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Brilliant's ROCE
In summary, it's great to see that Brilliant has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 128% total return over the last year tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.