What are the first trends we should look for to identify a stock that could multiply its value in the long term? Ideally, a business will display two trends; growth first return on capital employed (ROCE) and, secondly, a growing Amount of capital employed. Ultimately, this shows that it is a business that reinvests profits at increasing rates of return. With that in mind, the ROCE of B&M European Value Retail (LON:BME) looks great, so let’s see what the trend can tell us.
What is return on capital employed (ROCE)?
For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for B&M European Value Retail:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = £610 million ÷ (£3.6 billion – £755 million) (Based on the last twelve months to March 2022).
So, B&M European Value Retail has a ROCE of 21%. That’s fantastic performance, and not only that, it beats the 17% average earned by companies in a similar industry.
In the chart above, we have measured B&M European Value Retail’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are forecasting going forward, you should check out our free report for B&M European Value Retail.
What is the trend of returns?
The trends we have seen in B&M European Value Retail are quite reassuring. The numbers show that in the last five years, the returns generated on the capital employed have grown considerably to 21%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has also increased by 95%. So we are very inspired by what we are seeing in B&M European Value Retail thanks to its ability to profitably reinvest capital.
What can we learn from ROCE from B&M European Value Retail
A company that is increasing its return on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what B&M European Value Retail has. Given that the stock has only returned 6.8% to shareholders over the last five years, investors may not yet recognize the promising fundamentals. So with that in mind, we think the stock deserves further investigation.
Since virtually every business faces some risks, it pays to know what they are, and we’ve spotted 3 warning signs for B&M European Value Retail (of which 1 makes us a bit uncomfortable!) that you should know about.
B&M European Value Retail is not the only stock to see high returns. If you want to see more, check out our free list of companies that earn high returns on capital with strong fundamentals.
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find out if B&M European Value Retail is potentially overvalued or undervalued by consulting our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, internal transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.