Returns On Capital Are A Standout For Brilliant (HMSE:BAG)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Brilliant (HMSE:BAG) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Brilliant:

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

0.30 = €3.4m ÷ (€33m - €21m) (Based on the trailing twelve months to December 2023).

So, Brilliant has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 6.3%.

See our latest analysis for Brilliant

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Brilliant's past further, check out this free graph covering Brilliant's past earnings, revenue and cash flow.

What Does the ROCE Trend For Brilliant Tell Us?

It's great to see that Brilliant has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 30% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 46%. Brilliant could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 66% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Brilliant's ROCE

In a nutshell, we're pleased to see that Brilliant has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 48% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.

Brilliant does have some risks though, and we've spotted 3 warning signs for Brilliant that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.