What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Bharatiya Global Infomedia (NSE:BGLOBAL), the trends above didn't look too great.
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 Bharatiya Global Infomedia:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0053 = ₹6.2m ÷ (₹1.3b - ₹176m) (Based on the trailing twelve months to June 2021).
Thus, Bharatiya Global Infomedia has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bharatiya Global Infomedia's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Bharatiya Global Infomedia, check out these free graphs here.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Bharatiya Global Infomedia. About five years ago, returns on capital were 1.5%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Bharatiya Global Infomedia to turn into a multi-bagger.
What We Can Learn From Bharatiya Global Infomedia's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Bharatiya Global Infomedia (including 2 which are a bit unpleasant) .
While Bharatiya Global Infomedia 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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