Our Take On The Returns On Capital At Briscoe Group (NZSE:BGP)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Briscoe Group (NZSE:BGP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Briscoe Group is:

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

0.18 = NZ$92m ÷ (NZ$631m - NZ$112m) (Based on the trailing twelve months to July 2020).

So, Briscoe Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Specialty Retail industry.

View our latest analysis for Briscoe Group

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

What Can We Tell From Briscoe Group's ROCE Trend?

When we looked at the ROCE trend at Briscoe Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 33% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Briscoe Group has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Briscoe Group's ROCE

Bringing it all together, while we're somewhat encouraged by Briscoe Group's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 161% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Briscoe Group, we've discovered 2 warning signs that you should be aware of.

While Briscoe Group 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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