What Do The Returns On Capital At Blue Dart Express (NSE:BLUEDART) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Blue Dart Express (NSE:BLUEDART) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Blue Dart Express is:

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

0.041 = ₹546m ÷ (₹26b - ₹13b) (Based on the trailing twelve months to September 2020).

Therefore, Blue Dart Express has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 9.6%.

See our latest analysis for Blue Dart Express

Above you can see how the current ROCE for Blue Dart Express compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Blue Dart Express' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 32% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 side note, Blue Dart Express' current liabilities have increased over the last five years to 49% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.1%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

In summary, we're somewhat concerned by Blue Dart Express' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 42% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Blue Dart Express (of which 1 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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