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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 BMTC Group (TSE:GBT), it didn't seem to tick all of these boxes.

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 BMTC Group is:

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

0.16 = CA$66m ÷ (CA$551m - CA$124m) (Based on the trailing twelve months to October 2022).

Thus, BMTC Group has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.

Check out our latest analysis for BMTC Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for BMTC Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of BMTC Group, check out these free graphs here.

So How Is BMTC Group's ROCE Trending?

When we looked at the ROCE trend at BMTC Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 28% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, BMTC Group has decreased its current liabilities to 23% 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. 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.

In Conclusion...

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. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think BMTC Group has the makings of a multi-bagger.

BMTC Group does have some risks though, and we've spotted 2 warning signs for BMTC Group that you might be interested in.

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.

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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.