Returns On Capital Are Showing Encouraging Signs At Baran Group (TLV:BRAN)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Baran Group's (TLV:BRAN) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Baran Group is:

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

0.10 = ₪22m ÷ (₪352m - ₪139m) (Based on the trailing twelve months to December 2020).

Therefore, Baran Group has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.8%.

See 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're interested in investigating Baran Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Baran Group Tell Us?

The fact that Baran Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 10% on its capital. And unsurprisingly, like most companies trying to break into the black, Baran Group is utilizing 68% more capital than it was five years ago. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 40%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

To the delight of most shareholders, Baran Group has now broken into profitability. And with a respectable 45% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Baran Group, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Baran Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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