There Are Reasons To Feel Uneasy About BMTC Group's (TSE:GBT) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at BMTC Group (TSE:GBT), it does have a high ROCE right now, but lets see how returns are trending.

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. To calculate this metric for BMTC Group, this is the formula:

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

0.22 = CA$67m ÷ (CA$450m - CA$140m) (Based on the trailing twelve months to January 2021).

Therefore, BMTC Group has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 8.2%.

See our latest analysis for BMTC Group

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 BMTC Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From BMTC Group's ROCE Trend?

On the surface, the trend of ROCE at BMTC Group doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 32%. However it looks like BMTC Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

In summary, BMTC Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 22% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for BMTC Group (of which 1 is potentially serious!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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