Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Barón de Ley (BME:BDL), it didn't seem to tick all of these boxes.
What is 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 Barón de Ley:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = €21m ÷ (€361m - €53m) (Based on the trailing twelve months to December 2020).
Thus, Barón de Ley has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Beverage industry average of 9.2%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Barón de Ley's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Barón de Ley, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Barón de Ley. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Barón de Ley's ROCE
In summary, Barón de Ley has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for Barón de Ley you'll probably want to know about.
While Barón de Ley isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
When trading Barón de Ley or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.