Brim hf (ICE:BRIM) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Brim hf (ICE:BRIM), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Brim hf:

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

0.081 = €53m ÷ (€782m - €126m) (Based on the trailing twelve months to March 2021).

Therefore, Brim hf has an ROCE of 8.1%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.

See our latest analysis for Brim hf

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

So How Is Brim hf's ROCE Trending?

When we looked at the ROCE trend at Brim hf, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 8.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Brim hf is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 104% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Brim hf does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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