Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at B.O.S. Better Online Solutions (NASDAQ:BOSC) and its trend of ROCE, we really liked what we saw.
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Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on B.O.S. Better Online Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.032 = US$483k ÷ (US$25m – US$9.4m) (Based on the trailing twelve months to March 2020).
So, B.O.S. Better Online Solutions has an ROCE of 3.2%. Ultimately, that’s a low return and it under-performs the Communications industry average of 6.5%.
Check out our latest analysis for B.O.S. Better Online Solutions
Historical performance is a great place to start when researching a stock so above you can see the gauge for B.O.S. Better Online Solutions’ ROCE against it’s prior returns. If you’d like to look at how B.O.S. Better Online Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is B.O.S. Better Online Solutions’ ROCE Trending?
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.2%. The amount of capital employed has increased too, by 174%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books.
The Bottom Line On B.O.S. Better Online Solutions’ ROCE
All in all, it’s terrific to see that B.O.S. Better Online Solutions is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. Given that, we’d look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to continue researching B.O.S. Better Online Solutions, you might be interested to know about the 3 warning signs that our analysis has discovered.
While B.O.S. Better Online Solutions may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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