Balwin Properties (JSE:BWN) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Balwin Properties (JSE:BWN), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Balwin Properties is:

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

0.039 = R215m ÷ (R7.7b - R2.1b) (Based on the trailing twelve months to August 2024).

Thus, Balwin Properties has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.1%.

Check out our latest analysis for Balwin Properties

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 Balwin Properties' past further, check out this free graph covering Balwin Properties' past earnings, revenue and cash flow .

So How Is Balwin Properties' ROCE Trending?

When we looked at the ROCE trend at Balwin Properties, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 3.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line On Balwin Properties' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Balwin Properties have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 15% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Balwin Properties (of which 2 are a bit unpleasant!) that you should know about.

While Balwin Properties 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.