Returns On Capital Are A Standout For Bombay Burmah Trading Corporation (NSE:BBTC)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Bombay Burmah Trading Corporation's (NSE:BBTC) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Bombay Burmah Trading Corporation:

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

0.31 = ₹32b ÷ (₹157b - ₹54b) (Based on the trailing twelve months to June 2023).

Therefore, Bombay Burmah Trading Corporation has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Bombay Burmah Trading Corporation

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

What Can We Tell From Bombay Burmah Trading Corporation's ROCE Trend?

Bombay Burmah Trading Corporation is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 62% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Bombay Burmah Trading Corporation has. And since the stock has fallen 39% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Bombay Burmah Trading Corporation, you might be interested to know about the 1 warning sign that our analysis has discovered.

Bombay Burmah Trading Corporation is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.