Stock Analysis

Some Investors May Be Worried About BEST's (WSE:BST) Returns On Capital

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WSE:BST
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 BEST (WSE:BST) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 BEST:

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

0.073 = zł60m ÷ (zł1.2b - zł347m) (Based on the trailing twelve months to September 2020).

Thus, BEST has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 13%.

View our latest analysis for BEST

roce
WSE:BST Return on Capital Employed April 19th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for BEST's ROCE against it's prior returns. If you'd like to look at how BEST 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 BEST's ROCE Trend?

On the surface, the trend of ROCE at BEST doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that BEST is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching BEST, you might be interested to know about the 2 warning signs that our analysis has discovered.

While BEST 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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