Capital Allocation Trends At Carbochim (BVB:CBC) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Carbochim (BVB:CBC), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Carbochim is:

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

0.0019 = RON168k ÷ (RON117m - RON27m) (Based on the trailing twelve months to December 2022).

Therefore, Carbochim has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 4.8%.

View our latest analysis for Carbochim

Historical performance is a great place to start when researching a stock so above you can see the gauge for Carbochim's ROCE against it's prior returns. If you're interested in investigating Carbochim's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Carbochim's ROCE Trending?

When we looked at the ROCE trend at Carbochim, we didn't gain much confidence. To be more specific, ROCE has fallen from 1.9% over the last five years. However it looks like Carbochim might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Carbochim's ROCE

To conclude, we've found that Carbochim is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 288% return in the last five years, so the market appears to be rosy about its future. 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 know some of the risks facing Carbochim we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.