If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Bulgartabac Holding AD (BUL:BTH), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Bulgartabac Holding AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.009 = лв5.3m ÷ (лв659m - лв65m) (Based on the trailing twelve months to September 2020).
Therefore, Bulgartabac Holding AD has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Tobacco industry average of 15%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Bulgartabac Holding AD, check out these free graphs here.
So How Is Bulgartabac Holding AD's ROCE Trending?
When we looked at the ROCE trend at Bulgartabac Holding AD, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Bulgartabac Holding AD has done well to pay down its current liabilities to 9.8% 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 Bulgartabac Holding AD's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Bulgartabac Holding AD have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 89% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Bulgartabac Holding AD we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.
While Bulgartabac Holding AD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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