What Do The Returns On Capital At Boule Diagnostics (STO:BOUL) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Boule Diagnostics (STO:BOUL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Boule Diagnostics:

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

0.10 = kr40m ÷ (kr557m - kr165m) (Based on the trailing twelve months to September 2020).

So, Boule Diagnostics has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Medical Equipment industry average of 11%.

Check out our latest analysis for Boule Diagnostics

Above you can see how the current ROCE for Boule Diagnostics 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 Boule Diagnostics.

The Trend Of ROCE

When we looked at the ROCE trend at Boule Diagnostics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 14% five years ago. However it looks like Boule Diagnostics 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.

The Bottom Line

To conclude, we've found that Boule Diagnostics is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 155% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Boule Diagnostics could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Boule Diagnostics 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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