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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Boom Logistics' (ASX:BOL) returns on capital, so let's have a look.
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 Boom Logistics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = AU$12m ÷ (AU$243m - AU$68m) (Based on the trailing twelve months to June 2024).
Thus, Boom Logistics has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.
See our latest analysis for Boom Logistics
Historical performance is a great place to start when researching a stock so above you can see the gauge for Boom Logistics' ROCE against it's prior returns. If you'd like to look at how Boom Logistics has performed in the past in other metrics, you can view this free graph of Boom Logistics' past earnings, revenue and cash flow.
What Does the ROCE Trend For Boom Logistics Tell Us?
Shareholders will be relieved that Boom Logistics has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 7.0%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
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 28% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.