Returns On Capital At Bid (JSE:BID) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So, when we ran our eye over Bid's (JSE:BID) trend of ROCE, we liked what we saw.

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. Analysts use this formula to calculate it for Bid:

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

0.16 = R7.4b ÷ (R80b - R32b) (Based on the trailing twelve months to June 2022).

Thus, Bid has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.

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 to see what analysts are forecasting going forward, you should check out our free report for Bid.

What Does the ROCE Trend For Bid Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 57% more capital in the last five years, and the returns on that capital have remained stable at 16%. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Bid's ROCE

In the end, Bid has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 35% over the last five years for shareholders who have owned the stock in this period. So to determine if Bid is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you're still interested in Bid it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.