Returns On Capital Signal Tricky Times Ahead For Boule Diagnostics (STO:BOUL)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Boule Diagnostics (STO:BOUL), we don't think it's current trends fit the mold of a multi-bagger.

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 Boule Diagnostics, this is the formula:

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

0.11 = kr40m ÷ (kr609m - kr239m) (Based on the trailing twelve months to June 2022).

Therefore, Boule Diagnostics has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Medical Equipment industry.

See our latest analysis for Boule Diagnostics

In the above chart we have measured Boule Diagnostics' 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 Boule Diagnostics here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Boule Diagnostics doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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.

On a side note, Boule Diagnostics' current liabilities have increased over the last five years to 39% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 11%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Boule Diagnostics' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Boule Diagnostics. However, despite the promising trends, the stock has fallen 58% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 2 warning signs for Boule Diagnostics that we think you should be aware of.

While Boule Diagnostics 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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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.