B.O.S. Better Online Solutions (NASDAQ:BOSC) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think B.O.S. Better Online Solutions (NASDAQ:BOSC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 B.O.S. Better Online Solutions, this is the formula:

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

0.024 = US$337k ÷ (US$23m - US$8.9m) (Based on the trailing twelve months to December 2020).

Thus, B.O.S. Better Online Solutions has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.8%.

Check out our latest analysis for B.O.S. Better Online Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for B.O.S. Better Online Solutions' ROCE against it's prior returns. If you'd like to look at how B.O.S. Better Online Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From B.O.S. Better Online Solutions' ROCE Trend?

On the surface, the trend of ROCE at B.O.S. Better Online Solutions doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.4% from 6.8% 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.

The Bottom Line On B.O.S. Better Online Solutions' ROCE

Bringing it all together, while we're somewhat encouraged by B.O.S. Better Online Solutions' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 49% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

B.O.S. Better Online Solutions does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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