If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Bowler Metcalf (JSE:BCF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is 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. The formula for this calculation on Bowler Metcalf is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = R90m ÷ (R767m - R57m) (Based on the trailing twelve months to June 2020).
Therefore, Bowler Metcalf has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 11%.
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 want to delve into the historical earnings, revenue and cash flow of Bowler Metcalf, check out these free graphs here.
So How Is Bowler Metcalf's ROCE Trending?
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. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. 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.
The Bottom Line On Bowler Metcalf's ROCE
In a nutshell, Bowler Metcalf has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing, we've spotted 2 warning signs facing Bowler Metcalf that you might find interesting.
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