Yahoo Finance Be Wary Of Bengal Energy (TSE:BNG) And Its Returns On Capital
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Bengal Energy (TSE:BNG), we've spotted some signs that it could be struggling, so let's investigate.
What Is 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. The formula for this calculation on Bengal Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = CA$570k ÷ (CA$51m - CA$3.0m) (Based on the trailing twelve months to December 2022).
Thus, Bengal Energy has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 21%.
See our latest analysis for Bengal Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bengal Energy's ROCE against it's prior returns. If you're interested in investigating Bengal Energy's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Bengal Energy's ROCE Trend?
In terms of Bengal Energy's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Bengal Energy becoming one if things continue as they have.
On a related note, Bengal Energy has decreased its current liabilities to 6.0% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 30% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Bengal Energy (of which 1 is concerning!) that you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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