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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Braime Group's (LON:BMT) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Braime Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£3.7m ÷ (UK£34m - UK£11m) (Based on the trailing twelve months to December 2023).
Therefore, Braime Group has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Trade Distributors industry.
Check out our latest analysis for Braime Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Braime Group's ROCE against it's prior returns. If you're interested in investigating Braime Group's past further, check out this free graph covering Braime Group's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 56% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Braime Group's ROCE
To sum it up, Braime Group has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 52%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
One more thing to note, we've identified 2 warning signs with Braime Group and understanding these should be part of your investment process.
While Braime Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.