Stock Analysis

Brembo (BIT:BRE) Is Reinvesting At Lower Rates Of Return

BIT:BRE
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Brembo (BIT:BRE), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Brembo is:

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

0.083 = €202m ÷ (€3.3b - €907m) (Based on the trailing twelve months to March 2021).

Thus, Brembo has an ROCE of 8.3%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

Check out our latest analysis for Brembo

roce
BIT:BRE Return on Capital Employed May 17th 2021

Above you can see how the current ROCE for Brembo 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.

What The Trend Of ROCE Can Tell Us

In terms of Brembo's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last five years. 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.

On a side note, Brembo has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Brembo's ROCE

To conclude, we've found that Brembo is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 7.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Brembo, we've discovered 2 warning signs that you should be aware of.

While Brembo isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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