The Returns On Capital At BluMetric Environmental (CVE:BLM) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think BluMetric Environmental (CVE:BLM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on BluMetric Environmental is:

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

0.052 = CA$1.2m ÷ (CA$39m - CA$16m) (Based on the trailing twelve months to December 2024).

Thus, BluMetric Environmental has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 6.7%.

See our latest analysis for BluMetric Environmental

Above you can see how the current ROCE for BluMetric Environmental compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for BluMetric Environmental .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 8.6% five years ago, while capital employed has grown 141%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with BluMetric Environmental's earnings and if they change as a result from the capital raise.

On a side note, BluMetric Environmental's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.2%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that BluMetric Environmental is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 1,460% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 4 warning signs with BluMetric Environmental and understanding them should be part of your investment process.

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.

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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.