Black Diamond Group's (TSE:BDI) Returns On Capital Are Heading Higher
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Black Diamond Group (TSE:BDI) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Black Diamond Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CA$47m ÷ (CA$654m - CA$76m) (Based on the trailing twelve months to June 2023).
So, Black Diamond Group has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.7%.
See our latest analysis for Black Diamond Group
In the above chart we have measured Black Diamond Group'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 Black Diamond Group here for free.
What Does the ROCE Trend For Black Diamond Group Tell Us?
Black Diamond Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.2% which is a sight for sore eyes. In addition to that, Black Diamond Group is employing 55% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On Black Diamond Group's ROCE
Overall, Black Diamond Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 122% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Black Diamond Group can keep these trends up, it could have a bright future ahead.
On a final note, we found 2 warning signs for Black Diamond Group (1 makes us a bit uncomfortable) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
