What are the early trends to look for to identify a stock that could multiply in value over the long term? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So on that note, Beam Communications Holdings (ASX:BCC) looks quite promising when it comes to its capital return trends.
What is return on capital employed (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on Beam Communications Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.025 = AU$443,000 ÷ (AU$24m – AU$6.5m) (Based on the last twelve months to December 2021).
So, Beam Communications Holdings has a ROCE of 2.5%. In absolute terms, this is a weak return and it is also below the communications industry average of 7.0%.
Check out our latest analysis for Beam Communications Holdings
Historical performance is a great starting point when researching a stock. So above you can see Beam Communications Holdings’ ROCE gauge compared to its past returns. If you want to investigate more about the past of Beam Communications Holdings, check out this free chart of past profits, revenue and cash flow.
What the ROCE trend can tell us
The fact that Beam Communications Holdings is now generating pre-tax profits on its past investments is very encouraging. The shareholders would no doubt rejoice because the company was loss-making five years ago but now generates 2.5% of its capital. Not only that, but the company is using 134% more capital than before, but that’s to be expected of a company trying to become profitable. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
Beam Communications Holdings ROCE Basics
In short, we are pleased to see that Beam Communications Holdings’ reinvestment activities have paid off and the company is now profitable. And since the stock has performed exceptionally well over the past five years, these trends are taken into account by investors. Therefore, we think it would be worth checking whether these trends will continue.
Like most businesses, Beam Communications Holdings involves certain risks, and we have found 4 warning signs of which you should be aware.
Although Beam Communications Holdings does not generate the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
