Stock Analysis

Bapcor's (ASX:BAP) Returns On Capital Are Heading Higher

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ASX:BAP
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Bapcor's (ASX:BAP) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Bapcor, this is the formula:

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

0.12 = AU$198m ÷ (AU$2.0b - AU$348m) (Based on the trailing twelve months to June 2022).

Therefore, Bapcor has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 9.4% it's much better.

Check out the opportunities and risks within the AU Retail Distributors industry.

roce
ASX:BAP Return on Capital Employed November 11th 2022

Above you can see how the current ROCE for Bapcor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bapcor.

What Does the ROCE Trend For Bapcor Tell Us?

Bapcor is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 56%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Bapcor's ROCE

In summary, it's great to see that Bapcor can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 40% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Bapcor, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Bapcor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

Find out whether Bapcor is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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