Stock Analysis

Here's What's Concerning About BIOREM's (CVE:BRM) Returns On Capital

TSXV:BRM
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think BIOREM (CVE:BRM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 BIOREM:

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

0.078 = CA$1.1m ÷ (CA$23m - CA$8.4m) (Based on the trailing twelve months to September 2021).

Thus, BIOREM has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

View our latest analysis for BIOREM

roce
TSXV:BRM Return on Capital Employed January 26th 2022

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

What Can We Tell From BIOREM's ROCE Trend?

In terms of BIOREM's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 45%, but since then they've fallen to 7.8%. 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 related note, BIOREM has decreased its current liabilities to 37% 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.

In Conclusion...

In summary, BIOREM is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 179% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 3 warning signs we've spotted with BIOREM (including 2 which are significant) .

While BIOREM may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

Find out whether BioRem 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.