Should We Be Excited About The Trends Of Returns At Bon Fame (GTSM:8433)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Bon Fame (GTSM:8433), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Bon Fame, this is the formula:

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

0.15 = NT$229m ÷ (NT$2.9b - NT$1.3b) (Based on the trailing twelve months to September 2020).

Therefore, Bon Fame has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 4.1% generated by the Luxury industry.

See our latest analysis for Bon Fame

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Bon Fame, check out these free graphs here.

What Can We Tell From Bon Fame's ROCE Trend?

When we looked at the ROCE trend at Bon Fame, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Bon Fame's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Bon Fame's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Bon Fame have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 63% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Bon Fame (of which 2 make us uncomfortable!) that you should know about.

While Bon Fame 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. 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.
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