Briscoe Group (NZSE:BGP) Is Reinvesting At Lower Rates Of Return

By
Simply Wall St
Published
October 22, 2021
NZSE:BGP
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Briscoe Group (NZSE:BGP), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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

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

0.26 = NZ$141m ÷ (NZ$654m - NZ$106m) (Based on the trailing twelve months to August 2021).

Thus, Briscoe Group has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.

Check out our latest analysis for Briscoe Group

roce
NZSE:BGP Return on Capital Employed October 22nd 2021

In the above chart we have measured Briscoe Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Briscoe Group here for free.

So How Is Briscoe Group's ROCE Trending?

In terms of Briscoe Group's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 41% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Briscoe Group's ROCE

While returns have fallen for Briscoe Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 153% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Briscoe Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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