Slowing Rates Of Return At EBOS Group (NZSE:EBO) Leave Little Room For Excitement

Published
June 24, 2022
NZSE:EBO
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, the ROCE of EBOS Group (NZSE:EBO) looks decent, right now, so lets see what the trend of returns can tell us.

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. To calculate this metric for EBOS Group, this is the formula:

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

0.11 = AU$308m ÷ (AU$4.7b - AU$2.0b) (Based on the trailing twelve months to December 2021).

So, EBOS Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 0.6% it's much better.

View our latest analysis for EBOS Group

roce
NZSE:EBO Return on Capital Employed June 24th 2022

Above you can see how the current ROCE for EBOS Group 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 EBOS Group.

So How Is EBOS Group's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 91% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, EBOS Group has done well to reduce current liabilities to 42% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line On EBOS Group's ROCE

To sum it up, EBOS Group has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 169% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing, we've spotted 1 warning sign facing EBOS Group that you might find interesting.

While EBOS Group 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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