Stock Analysis

BluMetric Environmental (CVE:BLM) Will Be Hoping To Turn Its Returns On Capital Around

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TSXV:BLM
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at BluMetric Environmental (CVE:BLM), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for BluMetric Environmental:

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

0.12 = CA$1.7m ÷ (CA$21m - CA$6.8m) (Based on the trailing twelve months to December 2022).

So, BluMetric Environmental has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Commercial Services industry.

View our latest analysis for BluMetric Environmental

roce
TSXV:BLM Return on Capital Employed March 15th 2023

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're interested in investigating BluMetric Environmental's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of BluMetric Environmental's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 29%, but since then they've fallen to 12%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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, BluMetric Environmental has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On BluMetric Environmental's ROCE

Bringing it all together, while we're somewhat encouraged by BluMetric Environmental's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

BluMetric Environmental does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While BluMetric Environmental isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

Find out whether BluMetric Environmental 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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