Yahoo Finance Be Wary Of Beacon Lighting Group (ASX:BLX) And Its Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Beacon Lighting Group (ASX:BLX), it does have a high ROCE right now, but lets see how returns are trending.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Beacon Lighting Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = AU$61m ÷ (AU$339m - AU$99m) (Based on the trailing twelve months to December 2022).
Thus, Beacon Lighting Group has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.
Check out our latest analysis for Beacon Lighting Group
Above you can see how the current ROCE for Beacon Lighting Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beacon Lighting Group here for free.
What Can We Tell From Beacon Lighting Group's ROCE Trend?
On the surface, the trend of ROCE at Beacon Lighting Group doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 35%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Beacon Lighting Group has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Beacon Lighting Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Beacon Lighting Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 22% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a final note, we've found 1 warning sign for Beacon Lighting Group that we think you should be aware of.
Beacon Lighting Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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