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Beeks Trading (LON:BKS) Could Be Struggling To Allocate Capital

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  • BKS.L

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Beeks Trading (LON:BKS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Beeks Trading:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.031 = UK£540k ÷ (UK£23m - UK£5.4m) (Based on the trailing twelve months to June 2021).

Therefore, Beeks Trading has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

Check out our latest analysis for Beeks Trading

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In the above chart we have measured Beeks Trading's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beeks Trading here for free.

So How Is Beeks Trading's ROCE Trending?

On the surface, the trend of ROCE at Beeks Trading doesn't inspire confidence. To be more specific, ROCE has fallen from 46% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Beeks Trading has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Beeks Trading's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Beeks Trading is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 41% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 3 warning signs for Beeks Trading (1 can't be ignored) you should be aware of.

While Beeks Trading isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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