If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. That said, from the first glance at Bloomsbury editions (LON: BMY), we are not jumping from our chairs on the yield trend, but taking a closer look.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Bloomsbury Publishing, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.099 = £ 18million (£ 259million – £ 77million) (Based on the last twelve months up to February 2021).
So, Bloomsbury Publishing has a ROCE of 9.9%. Even though it is in line with the industry average of 9.9%, it is still a poor performance in and of itself.
In the chart above, we’ve measured Bloomsbury Publishing’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Bloomsbury Publishing.
What can we say about Bloomsbury Publishing’s ROCE trend?
Returns on capital have not changed much for Bloomsbury Publishing in recent years. Over the past five years, ROCE has remained relatively stable at around 9.9% and the company has deployed 33% additional capital in its operations. Since the company has increased the amount of capital used, it seems that the investments that have been made are simply not providing a high return on capital.
What we can learn from Bloomsbury Publishing’s ROCE
In short, Bloomsbury Publishing simply reinvested capital and generated the same low rate of return as before. Yet for long-term shareholders, the stock has offered them an incredible 159% return over the past five years, so the market seems bullish on its future. However, unless these underlying trends turn more positive, our hopes would not be too high.
One more thing to note, we have identified 1 warning sign with Bloomsbury Publishing and understanding this should be part of your investment process.
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.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. 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 the mentioned stocks.
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