If we are to find a title that could multiply over the long term, what are the underlying trends to look for? Generally, we will want to notice a growing trend return on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. Although, when we considered Bang abroad (NSE: BANG), he doesn’t seem to have ticked all of those boxes.
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. To calculate this metric for Bang Overseas, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.0022 = 2.1m ÷ (₹ 1.4b – ₹ 462m) (Based on the last twelve months up to December 2020).
So, Bang Overseas has a ROCE of 0.2%. At the end of the day, that’s a low return and it’s lower than the luxury industry average of 9.7%.
Check out our latest review for Bang Overseas
Historical performance is a great place to start when looking for a stock. So above you can see the gauge of the ROCE of Bang Overseas compared to its past returns. If you want to delve into the history of Bang Overseas earnings, income and cash flow, check out these free graphics here.
The ROCE trend
On the surface, the ROCE trend at Bang Overseas does not inspire confidence. About five years ago, returns on capital were 4.5%, but since then they have fallen to 0.2%. And given that incomes have fallen while employing more capital, we would be cautious. This could mean that the company is losing its competitive advantage or market share, because even if more money is invested in companies, it actually produces a lower return – “less bang for the buck” per se.
On a related note, Bang Overseas reduced its current liabilities to 33% of total assets. So we could link some of that to the decrease in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.
We’re a little worried about Bang Overseas, because despite deploying more capital in the business, both return on that capital and sales have fallen. Given that the stock has climbed 102% over the past five years, it seems investors have high expectations for the stock. Either way, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.
Like most businesses, Bang Overseas comes with certain risks, and we have found 1 warning sign that you should be aware of.
While Bang Overseas does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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