Yahoo Finance Is Bodycote (LON:BOY) Likely To Turn Things Around?
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Bodycote (LON:BOY), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Bodycote is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£104m ÷ (UK£1.2b - UK£301m) (Based on the trailing twelve months to June 2020).
Thus, Bodycote has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.9% it's much better.
Check out our latest analysis for Bodycote
In the above chart we have measured Bodycote's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Bodycote here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Bodycote, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
To conclude, we've found that Bodycote is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 53% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing to note, we've identified 3 warning signs with Bodycote and understanding these should be part of your investment process.
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.
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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