Returns On Capital Signal Tricky Times Ahead For B3 Consulting Group (STO:B3)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for B3 Consulting Group (STO:B3), we aren't jumping out of our chairs because returns are decreasing.

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 B3 Consulting Group, this is the formula:

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

0.29 = kr75m ÷ (kr560m - kr297m) (Based on the trailing twelve months to December 2021).

Therefore, B3 Consulting Group has an ROCE of 29%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

See our latest analysis for B3 Consulting Group

In the above chart we have measured B3 Consulting Group's 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 B3 Consulting Group here for free.

The Trend Of ROCE

When we looked at the ROCE trend at B3 Consulting Group, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 41% where it was 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.

Another thing to note, B3 Consulting Group has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To conclude, we've found that B3 Consulting Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 53% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

B3 Consulting Group does come with some risks though, we found 6 warning signs in our investment analysis, and 1 of those is potentially serious...

B3 Consulting Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.