Return Trends At Benchmark Electronics (NYSE:BHE) Aren't Appealing

By
Simply Wall St
Published
February 20, 2022
NYSE:BHE
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Benchmark Electronics (NYSE:BHE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Benchmark Electronics, this is the formula:

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

0.05 = US$62m ÷ (US$1.9b - US$654m) (Based on the trailing twelve months to December 2021).

Thus, Benchmark Electronics has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

See our latest analysis for Benchmark Electronics

roce
NYSE:BHE Return on Capital Employed February 20th 2022

In the above chart we have measured Benchmark Electronics' 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 Benchmark Electronics here for free.

What Can We Tell From Benchmark Electronics' ROCE Trend?

Over the past five years, Benchmark Electronics' ROCE has remained relatively flat while the business is using 21% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 34% of total assets, this reported ROCE would probably be less than5.0% because total capital employed would be higher.The 5.0% ROCE could be even lower if current liabilities weren't 34% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Key Takeaway

Overall, we're not ecstatic to see Benchmark Electronics reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 12% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 2 warning signs for Benchmark Electronics that we think you should be aware of.

While Benchmark Electronics 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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