Returns on Capital Paint A Bright Future For B&M European Value Retail (LON:BME)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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, the ROCE of B&M European Value Retail (LON:BME) looks great, so lets see what the trend can tell us.

What Is 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. Analysts use this formula to calculate it for B&M European Value Retail:

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

0.21 = UK£610m ÷ (UK£3.6b - UK£755m) (Based on the trailing twelve months to March 2022).

So, B&M European Value Retail has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

View our latest analysis for B&M European Value Retail

In the above chart we have measured B&M European Value Retail's 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 B&M European Value Retail.

How Are Returns Trending?

The trends we've noticed at B&M European Value Retail are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. 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 95%. So we're very much inspired by what we're seeing at B&M European Value Retail thanks to its ability to profitably reinvest capital.

What We Can Learn From B&M European Value Retail'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 B&M European Value Retail has. Since the stock has only returned 6.8% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for B&M European Value Retail (of which 1 makes us a bit uncomfortable!) that you should know about.

B&M European Value Retail is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.