What are the early trends we should look for to identify a stock that could multiply in value over the long term? First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. With that in mind, we’ve noticed some promising trends at BayWa (ETR: BYW) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on BayWa is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.064 = € 315m ÷ (€ 9.9bn – € 5.0bn) (Based on the last twelve months up to March 2021).
So, BayWa has a ROCE of 6.4%. In absolute terms, this is a low return and it is also below the industry average for commercial distributors of 9.6%.
See our latest review for BayWa
Above you can see how BayWa’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What can we say about BayWa’s ROCE trend?
Even though the ROCE is still low in absolute terms, it is good to see that it is moving in the right direction. The figures show that over the past five years, the returns generated on capital employed have increased significantly to 6.4%. The amount of capital employed also increased by 49%. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
Another thing to note, BayWa has a high ratio of current liabilities to total assets of 50%. This can lead to certain risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
In summary, it is great to see that BayWa can increase returns by systematically reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. And with a respectable 97% attributed to those who held the stock over the past five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we believe it would be worth checking out whether these trends will continue.
If you wish to continue your research on BayWa, you may be interested in knowing the 2 warning signs that our analysis found.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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