Capital Allocation Trends At Blackmores (ASX:BKL) Aren't Ideal
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Blackmores (ASX:BKL), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Blackmores, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = AU$57m ÷ (AU$591m - AU$160m) (Based on the trailing twelve months to June 2022).
Therefore, Blackmores has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Personal Products industry.
View our latest analysis for Blackmores
In the above chart we have measured Blackmores' 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 Blackmores.
How Are Returns Trending?
In terms of Blackmores' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 33% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Blackmores' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Blackmores. These growth trends haven't led to growth returns though, since the stock has fallen 55% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
While Blackmores doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.
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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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