What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Boart Longyear (ASX:BLY) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Boart Longyear, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = US$28m ÷ (US$600m - US$120m) (Based on the trailing twelve months to June 2020).
So, Boart Longyear has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Boart Longyear's ROCE against it's prior returns. If you're interested in investigating Boart Longyear's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Boart Longyear's ROCE Trending?
It's great to see that Boart Longyear has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 34%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Bottom Line On Boart Longyear's ROCE
In the end, Boart Longyear has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 98% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Like most companies, Boart Longyear does come with some risks, and we've found 1 warning sign that you should be aware of.
While Boart Longyear 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.
This article by Simply Wall St is general in nature. 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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