Investors Shouldn't Overlook The Favourable Returns On Capital At Bouvet (OB:BOUV)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Ergo, when we looked at the ROCE trends at Bouvet (OB:BOUV), we liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Bouvet:

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

0.47 = kr323m ÷ (kr1.5b - kr775m) (Based on the trailing twelve months to March 2021).

Thus, Bouvet has an ROCE of 47%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

See our latest analysis for Bouvet

In the above chart we have measured Bouvet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bouvet.

How Are Returns Trending?

We'd be pretty happy with returns on capital like Bouvet. The company has employed 258% more capital in the last five years, and the returns on that capital have remained stable at 47%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Bouvet can keep this up, we'd be very optimistic about its future.

On a side note, Bouvet's current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In short, we'd argue Bouvet has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 572% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Bouvet, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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