Returns On Capital Are Showing Encouraging Signs At BayWa (ETR:BYW)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at BayWa (ETR:BYW) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for BayWa:

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

0.06 = €441m ÷ (€13b - €5.6b) (Based on the trailing twelve months to December 2022).

Therefore, BayWa has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 16%.

View our latest analysis for BayWa

Above you can see how the current ROCE for BayWa compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering BayWa here for free.

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 112%. So we're very much inspired by what we're seeing at BayWa thanks to its ability to profitably reinvest capital.

On a side note, BayWa's current liabilities are still rather high at 43% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On BayWa's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what BayWa has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 91% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing BayWa we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

While BayWa may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.