BATM Advanced Communications (LON:BVC) Is Very Good At Capital Allocation

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Speaking of which, we noticed some great changes in BATM Advanced Communications' (LON:BVC) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for BATM Advanced Communications, this is the formula:

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

0.22 = US$31m ÷ (US$196m - US$57m) (Based on the trailing twelve months to June 2021).

Therefore, BATM Advanced Communications has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Communications industry average of 16%.

View our latest analysis for BATM Advanced Communications

In the above chart we have measured BATM Advanced Communications' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering BATM Advanced Communications here for free.

What Can We Tell From BATM Advanced Communications' ROCE Trend?

BATM Advanced Communications has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 22% on its capital. And unsurprisingly, like most companies trying to break into the black, BATM Advanced Communications is utilizing 60% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On BATM Advanced Communications' ROCE

In summary, it's great to see that BATM Advanced Communications has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 140% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

BATM Advanced Communications does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.