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Should You Be Impressed By B.O.S. Better Online Solutions' (NASDAQ:BOSC) Returns on Capital?

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Simply Wall St
·4 min read
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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at B.O.S. Better Online Solutions (NASDAQ:BOSC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for B.O.S. Better Online Solutions:

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

0.021 = US$299k ÷ (US$24m - US$9.5m) (Based on the trailing twelve months to September 2020).

Therefore, B.O.S. Better Online Solutions has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 11%.

See our latest analysis for B.O.S. Better Online Solutions

roce
roce

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 want to delve into the historical earnings, revenue and cash flow of B.O.S. Better Online Solutions, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at B.O.S. Better Online Solutions, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.0% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, B.O.S. Better Online Solutions has decreased its current liabilities to 40% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, B.O.S. Better Online Solutions is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 91% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 4 warning signs we've spotted with B.O.S. Better Online Solutions (including 1 which makes us a bit uncomfortable) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.