Yahoo Finance The Returns On Capital At Breville Group (ASX:BRG) Don't Inspire Confidence
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Breville Group (ASX:BRG), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Breville Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = AU$156m ÷ (AU$1.2b - AU$343m) (Based on the trailing twelve months to June 2022).
So, Breville Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Consumer Durables industry.
View our latest analysis for Breville Group
In the above chart we have measured Breville Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Breville Group here for free.
What Does the ROCE Trend For Breville Group Tell Us?
When we looked at the ROCE trend at Breville Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 19% from 26% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Breville Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Breville Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 66% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Breville Group does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While Breville Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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