Investors Shouldn't Overlook The Favourable Returns On Capital At Black Box (NSE:BBOX)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Ergo, when we looked at the ROCE trends at Black Box (NSE:BBOX), we liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Black Box, this is the formula:

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

0.27 = ₹2.8b ÷ (₹30b - ₹19b) (Based on the trailing twelve months to December 2023).

So, Black Box has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.

See our latest analysis for Black Box

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

The Trend Of ROCE

Black Box deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 616% more capital into its operations. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 65% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line

In summary, we're delighted to see that Black Box has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 1,006% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Black Box, you might be interested to know about the 1 warning sign that our analysis has discovered.

Black Box 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.