What BF Utilities' (NSE:BFUTILITIE) Returns On Capital Can Tell Us

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at BF Utilities (NSE:BFUTILITIE), we've spotted some signs that it could be struggling, so let's investigate.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for BF Utilities:

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

0.081 = ₹1.5b ÷ (₹22b - ₹3.4b) (Based on the trailing twelve months to September 2020).

Therefore, BF Utilities has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Construction industry average of 9.1%.

View our latest analysis for BF Utilities

Historical performance is a great place to start when researching a stock so above you can see the gauge for BF Utilities' ROCE against it's prior returns. If you're interested in investigating BF Utilities' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of BF Utilities' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect BF Utilities to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 52% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing BF Utilities, we've discovered 3 warning signs that you should be aware of.

While BF Utilities 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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