There are a few key trends to look out for if we want to identify the next multi-bagger. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. Speaking of which, we’ve noticed big changes in Beam Communications Holdings’ (ASX:BCC) returns on capital, so let’s take a look.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested 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).
Therefore, Beam Communications Holdings has a ROCE of 2.5%. Ultimately, this is a poor return and is below the communications industry average of 6.8%.
Check out our latest analysis for Beam Communications Holdings
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into the earnings, revenue, and cash flow history of Beam Communications Holdings, check out these free graphics here.
What the ROCE trend can tell us
We are delighted to see that Beam Communications Holdings is reaping the rewards of its investments and is now generating pre-tax profits. 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.
What We Can Learn From Beam Communications Holdings ROCE
Overall, Beam Communications Holdings is getting a big boost from us thanks in large part to the fact that it is now profitable and reinvesting in its business. And with a respectable 54% attributed to those who held the shares over the past five years, you could say these developments are starting to get the attention they deserve. That being said, we still think the promising fundamentals mean the company merits further due diligence.
If you want to further research Beam Communications Holdings, you may be interested to know the 4 warning signs that our analysis found.
Although Beam Communications Holdings does not generate the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.