I am writing today to help inform people who are new to the stock market and want to begin learning the link between BMTC Group Inc (TSE:GBT)’s return fundamentals and stock market performance.
If you purchase a GBT share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to GBT’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand BMTC Group’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at BMTC Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. GBT’s ROCE is calculated below:
ROCE Calculation for GBT
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CA$63m ÷ (CA$313m – CA$108m) = 29%
As you can see, GBT earned CA$29.5 from every CA$100 you invested over the previous twelve months. This makes BMTC Group exceptionally profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a rapid rate over time.
Can any of this change?
The encouraging ROCE is good news for BMTC Group investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, GBT’s ROCE may deteriorate, in which case your money is better invested elsewhere. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that BMTC Group will continue the solid returns. If you go back three years, you’ll find that GBT’s ROCE has increased from 22%. Similarly, the movement in the earnings variable shows a jump from CA$59m to CA$63m whilst the amount of capital employed fell because of a decreased level of total assets and a larger reliance on current liabilities (increased borrowing to fund operations) , which means that ROCE has increased as a result of BMTC Group’s ability to grow earnings in conjunction with increased capital efficiency.
GBT’s investors have enjoyed an upward trend in ROCE and it is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for GBT’s future growth? Take a look at our free research report of analyst consensus for GBT’s outlook.
- Valuation: What is GBT worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GBT is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.