The Returns On Capital At BPL (NSE:BPL) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at BPL (NSE:BPL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 BPL is:

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

0.024 = ₹117m ÷ (₹5.4b - ₹429m) (Based on the trailing twelve months to June 2022).

Therefore, BPL has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 15%.

Check out our latest analysis for BPL

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

What Can We Tell From BPL's ROCE Trend?

When we looked at the ROCE trend at BPL, we didn't gain much confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 2.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On BPL's ROCE

To conclude, we've found that BPL is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 16% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for BPL (of which 1 is a bit unpleasant!) that you should know about.

While BPL 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.