Yahoo Finance Be Wary Of Baby Bunting Group (ASX:BBN) And Its Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Baby Bunting Group (ASX:BBN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Baby Bunting Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = AU$24m ÷ (AU$351m - AU$102m) (Based on the trailing twelve months to December 2023).
So, Baby Bunting Group has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 18%.
View our latest analysis for Baby Bunting Group
In the above chart we have measured Baby Bunting Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Baby Bunting Group .
The Trend Of ROCE
When we looked at the ROCE trend at Baby Bunting Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.7% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Baby Bunting Group's ROCE
In summary, Baby Bunting Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 7.9% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for Baby Bunting Group you'll probably want to know about.
While Baby Bunting Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
