Returns On Capital At Besalco (SNSE:BESALCO) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at Besalco (SNSE:BESALCO), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Besalco is:

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

0.076 = CL$39b ÷ (CL$781b - CL$274b) (Based on the trailing twelve months to March 2021).

So, Besalco has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 3.3% generated by the Construction industry, it's much better.

See our latest analysis for Besalco

Historical performance is a great place to start when researching a stock so above you can see the gauge for Besalco's ROCE against it's prior returns. If you're interested in investigating Besalco's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Besalco's ROCE Trend?

There are better returns on capital out there than what we're seeing at Besalco. The company has consistently earned 7.6% for the last five years, and the capital employed within the business has risen 28% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Besalco's ROCE

In conclusion, Besalco has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 80% over the last five years. 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 more thing: We've identified 2 warning signs with Besalco (at least 1 which is potentially serious) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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