If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Bapcor (ASX:BAP) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.10 = AU$139m ÷ (AU$1.7b - AU$329m) (Based on the trailing twelve months to June 2020).
Therefore, Bapcor has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Retail Distributors industry.
In the above chart we have measured Bapcor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 393%. That being said, Bapcor raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Bapcor's earnings and if they change as a result from the capital raise. Additionally, we found that Bapcor's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
What We Can Learn From Bapcor's ROCE
While returns have fallen for Bapcor in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 105% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Like most companies, Bapcor does come with some risks, and we've found 2 warning signs that you should be aware of.
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