Basic-Fit (AMS:BFIT) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Basic-Fit (AMS:BFIT), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Basic-Fit, this is the formula:

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

0.036 = €91m ÷ (€3.0b - €501m) (Based on the trailing twelve months to June 2023).

Therefore, Basic-Fit has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.0%.

See our latest analysis for Basic-Fit

Above you can see how the current ROCE for Basic-Fit compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Basic-Fit here for free.

What The Trend Of ROCE Can Tell Us

In terms of Basic-Fit's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.9% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Basic-Fit is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.3% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Basic-Fit does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Basic-Fit 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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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.