Many Would Be Envious Of B&M European Value Retail's (LON:BME) Excellent Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over B&M European Value Retail's (LON:BME) trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for B&M European Value Retail:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = UK£563m ÷ (UK£3.7b - UK£886m) (Based on the trailing twelve months to September 2023).
Thus, B&M European Value Retail has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.
Check out our latest analysis for B&M European Value Retail
Above you can see how the current ROCE for B&M European Value Retail compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for B&M European Value Retail .
What Can We Tell From B&M European Value Retail's ROCE Trend?
It's hard not to be impressed by B&M European Value Retail's returns on capital. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 71% more capital into its operations. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If B&M European Value Retail can keep this up, we'd be very optimistic about its future.
What We Can Learn From B&M European Value Retail's ROCE
In summary, we're delighted to see that B&M European Value Retail has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 113% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
B&M European Value Retail does have some risks though, and we've spotted 2 warning signs for B&M European Value Retail that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
