Bang Overseas' (NSE:BANG) Returns On Capital Not Reflecting Well On The Business

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Bang Overseas (NSE:BANG) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Bang Overseas is:

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

0.036 = ₹34m ÷ (₹1.4b - ₹427m) (Based on the trailing twelve months to June 2021).

Therefore, Bang Overseas has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

See our latest analysis for Bang Overseas

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

So How Is Bang Overseas' ROCE Trending?

When we looked at the ROCE trend at Bang Overseas, we didn't gain much confidence. Around five years ago the returns on capital were 7.2%, but since then they've fallen to 3.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Bang Overseas has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Bang Overseas have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 57% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 2 warning signs with Bang Overseas and understanding these should be part of your investment process.

While Bang Overseas 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.

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.

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