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The Returns At Braime Group (LON:BMT) Aren't Growing

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Braime Group (LON:BMT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Braime Group, this is the formula:

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

0.071 = UK£1.2m ÷ (UK£25m - UK£7.3m) (Based on the trailing twelve months to December 2020).

So, Braime Group has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 13%.

View our latest analysis for Braime Group

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Braime Group's ROCE against it's prior returns. If you'd like to look at how Braime Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Braime Group's ROCE Trending?

In terms of Braime Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.1% for the last five years, and the capital employed within the business has risen 69% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Braime Group's ROCE

In conclusion, Braime Group has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 235% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for Braime Group (1 is concerning) you should be aware of.

While Braime Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.