We're Watching These Trends At B.O.S. Better Online Solutions (NASDAQ:BOSC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at B.O.S. Better Online Solutions (NASDAQ:BOSC) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on B.O.S. Better Online Solutions is:

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

0.021 = US$299k ÷ (US$24m - US$9.5m) (Based on the trailing twelve months to September 2020).

Thus, B.O.S. Better Online Solutions has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.2%.

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?

In terms of B.O.S. Better Online Solutions' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.0% over the last five years. However it looks like B.O.S. Better Online Solutions 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.

On a side note, B.O.S. Better Online Solutions has done well to pay down its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

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. Unsurprisingly, the stock has only gained 37% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for B.O.S. Better Online Solutions (1 makes us a bit uncomfortable) you should be aware of.

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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