Here's What's Concerning About Brunello Cucinelli's (BIT:BC) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Brunello Cucinelli (BIT:BC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for Brunello Cucinelli:

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

0.026 = €20m ÷ (€1.1b - €311m) (Based on the trailing twelve months to December 2020).

So, Brunello Cucinelli has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 4.8%.

See our latest analysis for Brunello Cucinelli

Above you can see how the current ROCE for Brunello Cucinelli compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Brunello Cucinelli.

So How Is Brunello Cucinelli's ROCE Trending?

When we looked at the ROCE trend at Brunello Cucinelli, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 19% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Brunello Cucinelli have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 208%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Brunello Cucinelli (of which 1 is a bit unpleasant!) that you should know about.

While Brunello Cucinelli 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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