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The Returns On Capital At Bengal Energy (TSE:BNG) Don't Inspire Confidence

·3 min read

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Bengal Energy (TSE:BNG), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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 Bengal Energy, this is the formula:

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

0.0045 = CA$199k ÷ (CA$46m - CA$2.2m) (Based on the trailing twelve months to June 2022).

So, Bengal Energy has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 18%.

View our latest analysis for Bengal Energy

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bengal Energy's ROCE against it's prior returns. If you're interested in investigating Bengal Energy's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Bengal Energy's ROCE Trend?

We are a bit worried about the trend of returns on capital at Bengal Energy. Unfortunately the returns on capital have diminished from the 1.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Bengal Energy becoming one if things continue as they have.

On a side note, Bengal Energy has done well to pay down its current liabilities to 4.8% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line On Bengal Energy's ROCE

In summary, it's unfortunate that Bengal Energy is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 20% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Bengal Energy does have some risks though, and we've spotted 4 warning signs for Bengal Energy that you might be interested in.

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.

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

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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