Here's What To Make Of Basic-Fit's (AMS:BFIT) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Basic-Fit (AMS:BFIT), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Basic-Fit is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.034 = €91m ÷ (€3.2b - €561m) (Based on the trailing twelve months to December 2023).

So, Basic-Fit has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.3%.

Check out our latest analysis for Basic-Fit

In the above chart we have measured Basic-Fit's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Basic-Fit for free.

The Trend Of ROCE

In terms of Basic-Fit's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.4% for the last five years, and the capital employed within the business has risen 102% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Basic-Fit's ROCE

As we've seen above, Basic-Fit's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 30% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Basic-Fit and understanding them should be part of your investment process.

While Basic-Fit isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.