What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Bijou Brigitte modische Accessoires (ETR:BIJ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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 Bijou Brigitte modische Accessoires is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = €8.1m ÷ (€380m - €62m) (Based on the trailing twelve months to June 2020).
Therefore, Bijou Brigitte modische Accessoires has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.5%.
In the above chart we have measured Bijou Brigitte modische Accessoires' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bijou Brigitte modische Accessoires.
What Does the ROCE Trend For Bijou Brigitte modische Accessoires Tell Us?
When we looked at the ROCE trend at Bijou Brigitte modische Accessoires, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Bijou Brigitte modische Accessoires have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Like most companies, Bijou Brigitte modische Accessoires does come with some risks, and we've found 1 warning sign that you should be aware of.
While Bijou Brigitte modische Accessoires isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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