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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Bombardier's (TSE:BBD.B) returns on capital, so let's have a look.
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. To calculate this metric for Bombardier, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$946m ÷ (US$13b - US$5.8b) (Based on the trailing twelve months to December 2024).
Therefore, Bombardier has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Aerospace & Defense industry.
Check out our latest analysis for Bombardier
Above you can see how the current ROCE for Bombardier compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Bombardier for free.
What The Trend Of ROCE Can Tell Us
We're pretty happy with how the ROCE has been trending at Bombardier. The data shows that returns on capital have increased by 387% over the trailing five years. The company is now earning US$0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 29% less capital than it was five years ago. Bombardier may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
One more thing to note, Bombardier has decreased current liabilities to 46% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
The Key Takeaway
In the end, Bombardier has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 91% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.