Here's What To Make Of Bid's (JSE:BID) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So, when we ran our eye over Bid's (JSE:BID) trend of ROCE, we liked what we saw.

What Is 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. Analysts use this formula to calculate it for Bid:

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

0.17 = R8.9b ÷ (R86b - R34b) (Based on the trailing twelve months to December 2022).

So, Bid has an ROCE of 17%. By itself that's a normal return on capital and it's in line with the industry's average returns of 17%.

Check out our latest analysis for Bid

Above you can see how the current ROCE for Bid compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Bid here for free.

SWOT Analysis for Bid

What Does the ROCE Trend For Bid Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has employed 64% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Bid's ROCE

The main thing to remember is that Bid has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 65% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Bid could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Bid 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.