Returns On Capital Signal Tricky Times Ahead For Bang Overseas (NSE:BANG)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Bang Overseas (NSE:BANG), it didn't seem to tick all of these boxes.

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

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 Bang Overseas, this is the formula:

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

0.0022 = ₹2.1m ÷ (₹1.4b - ₹462m) (Based on the trailing twelve months to December 2020).

Thus, Bang Overseas has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.7%.

View 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.

The Trend Of ROCE

On the surface, the trend of ROCE at Bang Overseas doesn't inspire confidence. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 0.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Bang Overseas has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

We're a bit apprehensive about Bang Overseas because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 102% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Bang Overseas does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

If you decide to trade Bang Overseas, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.