Bri-Chem (TSE: BRY) returns on capital are on the rise
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. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we have noticed some big changes in Bri-Chem’s (TSE: BRY) back on capital, so let’s take a look.
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 Bri-Chem is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.082 = CA $ 1.4M ÷ (CA $ 37M – CA $ 19M) (Based on the last twelve months up to September 2021).
Therefore, Bri-Chem has a ROCE of 8.2%. In absolute terms, this is a low return and it is also below the industry average for commercial distributors of 17%.
See our latest review for Bri-Chem
Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Bri-Chem’s ROCE compared to its past yields. If you want to look at Bri-Chem’s performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.
So what’s the Bri-Chem ROCE trend?
Bri-Chem did not disappoint when it comes to ROCE growth. Data shows that returns on capital have increased by 509% over the past five years. This is not bad because it indicates that for every dollar invested (capital employed), the company increases the amount earned on that dollar. Speaking of capital employed, the company is actually using 57% less than it was five years ago, which may indicate that a company is improving its efficiency. A business that shrinks its asset base like this is usually not typical of a business that will soon be multi-bagger.
By the way, we’ve noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially, the business now has short-term suppliers or creditors funding about 53% of its operations, which is not ideal. And with current liabilities at these levels, it’s pretty high.
The key to take away
In short, we are delighted to see that Bri-Chem has been able to generate higher returns with less capital. Given that the stock has fallen 70% over the past five years, this could be a good investment if valuation and other metrics are attractive as well. It therefore seems warranted to further research this company and determine whether these trends will continue or not.
If you want to know some of the risks Bri-Chem faces, we have found 2 warning signs (1 shouldn’t be ignored!) Which you should be aware of before investing here.
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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