If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Société BIC (EPA:BB), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Société BIC, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = €288m ÷ (€2.2b - €499m) (Based on the trailing twelve months to September 2020).
Therefore, Société BIC has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Commercial Services industry.
Above you can see how the current ROCE for Société BIC compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Société BIC Tell Us?
Things have been pretty stable at Société BIC, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Société BIC to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Société BIC has been paying out a decent 59% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
Our Take On Société BIC's ROCE
In summary, Société BIC isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 60% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Société BIC does have some risks though, and we've spotted 3 warning signs for Société BIC that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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