Capital Allocation Trends At Blue Island (CSE:BLUE) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Blue Island (CSE:BLUE), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Blue Island, this is the formula:

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

0.04 = €724k ÷ (€22m - €3.7m) (Based on the trailing twelve months to December 2020).

Thus, Blue Island has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Food industry average of 9.4%.

Check out our latest analysis for Blue Island

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

So How Is Blue Island's ROCE Trending?

When we looked at the ROCE trend at Blue Island, we didn't gain much confidence. Around five years ago the returns on capital were 6.2%, but since then they've fallen to 4.0%. 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.

What We Can Learn From Blue Island's ROCE

To conclude, we've found that Blue Island is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 328% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 3 warning signs with Blue Island and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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.
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