Bowler Metcalf's (JSE:BCF) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Bowler Metcalf (JSE:BCF), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Bowler Metcalf, this is the formula:

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

0.11 = R91m ÷ (R867m - R74m) (Based on the trailing twelve months to December 2023).

So, Bowler Metcalf has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

See our latest analysis for Bowler Metcalf

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bowler Metcalf's ROCE against it's prior returns. If you're interested in investigating Bowler Metcalf's past further, check out this free graph covering Bowler Metcalf's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Bowler Metcalf's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Bowler Metcalf in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

In Conclusion...

In summary, Bowler Metcalf isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 168% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Bowler Metcalf does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Bowler Metcalf 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.