Returns On Capital - An Important Metric For Baran Group (TLV:BRAN)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Baran Group (TLV:BRAN) so let's look a bit deeper.

What is 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 Baran Group, this is the formula:

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

0.11 = ₪18m ÷ (₪324m - ₪161m) (Based on the trailing twelve months to September 2020).

Therefore, Baran Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 10%.

Check out our latest analysis for Baran Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Baran Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Baran Group, check out these free graphs here.

So How Is Baran Group's ROCE Trending?

We're delighted to see that Baran Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 11% on its capital. Not only that, but the company is utilizing 37% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 50%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

To the delight of most shareholders, Baran Group has now broken into profitability. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Baran Group we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Baran Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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