Stock Analysis

Bapcor (ASX:BAP) Has Some Way To Go To Become A Multi-Bagger

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ASX:BAP
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There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, the ROCE of Bapcor (ASX:BAP) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Bapcor is:

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

0.14 = AU$199m ÷ (AU$1.8b - AU$364m) (Based on the trailing twelve months to June 2021).

So, Bapcor has an ROCE of 14%. In isolation, that's a pretty standard return but against the Retail Distributors industry average of 20%, it's not as good.

View our latest analysis for Bapcor

roce
ASX:BAP Return on Capital Employed January 10th 2022

In the above chart we have measured Bapcor'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 Bapcor here for free.

So How Is Bapcor's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 169% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Bapcor has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

The main thing to remember is that Bapcor has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 35% over the last five years for shareholders who have owned the stock in this period. So to determine if Bapcor is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Bapcor does have some risks though, and we've spotted 1 warning sign for Bapcor that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

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