Should We Be Excited About The Trends Of Returns At Blue Island (CSE:BLUE)?

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Blue Island (CSE:BLUE), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Blue Island is:

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

0.07 = €1.3m ÷ (€23m - €4.1m) (Based on the trailing twelve months to June 2020).

Therefore, Blue Island has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.7%.

See 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?

In terms of Blue Island's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.0% from 10% five years ago. However it looks like Blue Island 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Blue Island's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 286% gain to shareholders who have held 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.

Blue Island does have some risks though, and we've spotted 1 warning sign for Blue Island 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. 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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