Returns On Capital At Bell Equipment (JSE:BEL) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Bell Equipment (JSE:BEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Bell Equipment:

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

0.0082 = R35m ÷ (R6.6b - R2.4b) (Based on the trailing twelve months to December 2020).

So, Bell Equipment has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.2%.

View our latest analysis for Bell Equipment

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're interested in investigating Bell Equipment's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Bell Equipment's ROCE Trending?

When we looked at the ROCE trend at Bell Equipment, we didn't gain much confidence. Around five years ago the returns on capital were 8.8%, but since then they've fallen to 0.8%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Bell Equipment's ROCE

In summary, we're somewhat concerned by Bell Equipment's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Bell Equipment (of which 1 is concerning!) that you should know about.

While Bell Equipment 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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