Investors Will Want Bubbles Intergroup's (TLV:BBLS) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Bubbles Intergroup (TLV:BBLS) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Bubbles Intergroup, this is the formula:

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

0.13 = ₪5.3m ÷ (₪76m - ₪36m) (Based on the trailing twelve months to June 2023).

Therefore, Bubbles Intergroup has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 12%.

Check out our latest analysis for Bubbles Intergroup

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Bubbles Intergroup has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Bubbles Intergroup's ROCE Trending?

We're delighted to see that Bubbles Intergroup 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 13% on its capital. And unsurprisingly, like most companies trying to break into the black, Bubbles Intergroup is utilizing 2,773% 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.

On a separate but related note, it's important to know that Bubbles Intergroup has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Bubbles Intergroup's ROCE

To the delight of most shareholders, Bubbles Intergroup has now broken into profitability. However the stock is down a substantial 98% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Bubbles Intergroup does have some risks, we noticed 5 warning signs (and 4 which can't be ignored) we think you should know about.

While Bubbles Intergroup 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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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.