Will Koninklijke Brill's (AMS:BRILL) Growth In ROCE Persist?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Koninklijke Brill (AMS:BRILL) so let's look a bit deeper.

What is 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 Koninklijke Brill, this is the formula:

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

0.12 = €3.7m ÷ (€50m - €21m) (Based on the trailing twelve months to June 2020).

So, Koninklijke Brill has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.9% it's much better.

View our latest analysis for Koninklijke Brill

Historical performance is a great place to start when researching a stock so above you can see the gauge for Koninklijke Brill's ROCE against it's prior returns. If you'd like to look at how Koninklijke Brill has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Koninklijke Brill's ROCE Trend?

Koninklijke Brill is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 50% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 41% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

As discussed above, Koninklijke Brill appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 2 warning signs we've spotted with Koninklijke Brill (including 1 which shouldn't be ignored) .

While Koninklijke Brill may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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