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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Bonso Electronics International (NASDAQ:BNSO), it didn't seem to tick all of these boxes.
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 Bonso Electronics International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$362k ÷ (US$24m - US$6.1m) (Based on the trailing twelve months to March 2020).
Therefore, Bonso Electronics International has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bonso Electronics International's ROCE against it's prior returns. If you're interested in investigating Bonso Electronics International's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Bonso Electronics International's ROCE Trending?
On the surface, the trend of ROCE at Bonso Electronics International doesn't inspire confidence. To be more specific, ROCE has fallen from 3.0% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Bonso Electronics International has done well to pay down its current liabilities to 25% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Bonso Electronics International's ROCE
While returns have fallen for Bonso Electronics International in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 127% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Bonso Electronics International does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...
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.
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