Beacon Lighting Group's (ASX:BLX) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for Beacon Lighting Group (ASX:BLX), we aren't jumping out of our chairs because returns are decreasing.

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. Analysts use this formula to calculate it for Beacon Lighting Group:

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

0.26 = AU$60m ÷ (AU$319m - AU$92m) (Based on the trailing twelve months to December 2021).

So, Beacon Lighting Group has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 19%.

View our latest analysis for Beacon Lighting Group

In the above chart we have measured Beacon Lighting Group'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 Can We Tell From Beacon Lighting Group's ROCE Trend?

In terms of Beacon Lighting Group's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 36%, but they have dropped over the last five years. However it looks like Beacon Lighting Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Beacon Lighting Group has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Beacon Lighting Group's ROCE

In summary, Beacon Lighting Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Beacon Lighting Group (of which 1 is significant!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.