The Return Trends At Borgosesia (BIT:BO) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Borgosesia (BIT:BO) and its trend of ROCE, we really liked what we saw.

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 Borgosesia is:

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

0.049 = €3.9m ÷ (€109m - €29m) (Based on the trailing twelve months to June 2021).

Therefore, Borgosesia has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 7.5%.

See our latest analysis for Borgosesia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Borgosesia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Borgosesia's ROCE Trending?

The fact that Borgosesia is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Borgosesia is utilizing 119% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Borgosesia has decreased current liabilities to 27% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Borgosesia has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Borgosesia's ROCE

To the delight of most shareholders, Borgosesia has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Borgosesia can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for Borgosesia (1 makes us a bit uncomfortable) you should be aware of.

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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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.