Trace Group Hold's (BUL:T57) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Trace Group Hold (BUL:T57), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Trace Group Hold, this is the formula:

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

0.035 = лв5.3m ÷ (лв269m - лв115m) (Based on the trailing twelve months to March 2023).

So, Trace Group Hold has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

Check out our latest analysis for Trace Group Hold

Historical performance is a great place to start when researching a stock so above you can see the gauge for Trace Group Hold's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Trace Group Hold, check out these free graphs here.

What Can We Tell From Trace Group Hold's ROCE Trend?

The returns on capital haven't changed much for Trace Group Hold in recent years. Over the past five years, ROCE has remained relatively flat at around 3.5% and the business has deployed 37% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, Trace Group Hold has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

As we've seen above, Trace Group Hold's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 9.0% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 6 warning signs we've spotted with Trace Group Hold (including 4 which are concerning) .

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.

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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.