Investors Could Be Concerned With BSA's (ASX:BSA) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within BSA (ASX:BSA), we weren't too hopeful.

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. The formula for this calculation on BSA is:

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

0.07 = AU$3.5m ÷ (AU$132m - AU$81m) (Based on the trailing twelve months to December 2020).

Therefore, BSA has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.0%.

See our latest analysis for BSA

In the above chart we have measured BSA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for BSA.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at BSA. Unfortunately the returns on capital have diminished from the 24% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect BSA to turn into a multi-bagger.

Another thing to note, BSA has a high ratio of current liabilities to total assets of 62%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's unfortunate that BSA is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 50% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 4 warning signs for BSA you'll probably want to know about.

While BSA 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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