Yahoo Finance Returns On Capital - An Important Metric For Begbies Traynor Group (LON:BEG)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Begbies Traynor Group (LON:BEG) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Begbies Traynor Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = UK£3.9m ÷ (UK£117m - UK£27m) (Based on the trailing twelve months to April 2020).
Therefore, Begbies Traynor Group has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.
Check out our latest analysis for Begbies Traynor Group
In the above chart we have measured Begbies Traynor Group'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 Begbies Traynor Group here for free.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at Begbies Traynor Group promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 21% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line On Begbies Traynor Group's ROCE
To sum it up, Begbies Traynor Group is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Begbies Traynor Group can keep these trends up, it could have a bright future ahead.
Begbies Traynor Group does have some risks though, and we've spotted 2 warning signs for Begbies Traynor Group that you might be interested in.
While Begbies Traynor Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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