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Investors Will Want B&M European Value Retail's (LON:BME) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So on that note, B&M European Value Retail (LON:BME) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on B&M European Value Retail is:

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

0.19 = UK£576m ÷ (UK£3.8b - UK£778m) (Based on the trailing twelve months to September 2022).

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Therefore, B&M European Value Retail has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 17% generated by the Multiline Retail industry.

Check out our latest analysis for B&M European Value Retail

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In the above chart we have measured B&M European Value Retail's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for B&M European Value Retail.

The Trend Of ROCE

The trends we've noticed at B&M European Value Retail are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 93% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On B&M European Value Retail's ROCE

To sum it up, B&M European Value Retail has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 47% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if B&M European Value Retail can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with B&M European Value Retail (at least 1 which is significant) , and understanding these would certainly be useful.

While B&M European Value Retail isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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