Stock Analysis

Bri-Chem's (TSE:BRY) Returns On Capital Are Heading Higher

TSX:BRY
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Bri-Chem's (TSE:BRY) returns on capital, so let's have a look.

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. The formula for this calculation on Bri-Chem is:

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

0.082 = CA$1.4m ÷ (CA$37m - CA$19m) (Based on the trailing twelve months to September 2021).

Therefore, Bri-Chem has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 17%.

View our latest analysis for Bri-Chem

roce
TSX:BRY Return on Capital Employed December 31st 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bri-Chem's ROCE against it's prior returns. If you'd like to look at how Bri-Chem has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Bri-Chem's ROCE Trending?

Bri-Chem has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 509% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 57% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 53% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In a nutshell, we're pleased to see that Bri-Chem has been able to generate higher returns from less capital. Given the stock has declined 70% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Bri-Chem we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

Find out whether Bri-Chem 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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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.