Bon Natural Life (NASDAQ:BON) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Bon Natural Life (NASDAQ:BON) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Bon Natural Life:

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

0.041 = US$1.9m ÷ (US$62m - US$16m) (Based on the trailing twelve months to September 2024).

So, Bon Natural Life has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.1%.

See our latest analysis for Bon Natural Life

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

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 37% five years ago, while the business's capital employed increased by 421%. That being said, Bon Natural Life raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Bon Natural Life's earnings and if they change as a result from the capital raise.

On a side note, Bon Natural Life has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Bon Natural Life's ROCE

In summary, we're somewhat concerned by Bon Natural Life's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 97% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Bon Natural Life does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While Bon Natural Life 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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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.