If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don’t think Bonso Electronics International (NASDAQ:BNSO) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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. Analysts use this formula to calculate it for Bonso Electronics International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.098 = US$1.9m ÷ (US$24m – US$5.1m) (Based on the trailing twelve months to September 2020).
Therefore, Bonso Electronics International has an ROCE of 9.8%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 10%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’d like to look at how Bonso Electronics International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The returns on capital haven’t changed much for Bonso Electronics International in recent years. Over the past five years, ROCE has remained relatively flat at around 9.8% and the business has deployed 43% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 21% of total assets, is good to see from a business owner’s perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On Bonso Electronics International’s ROCE
In conclusion, Bonso Electronics International has been investing more capital into the business, but returns on that capital haven’t increased. Investors must think there’s better things to come because the stock has knocked it out of the park, delivering a 394% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
One final note, you should learn about the 4 warning signs we’ve spotted with Bonso Electronics International (including 1 which is potentially serious) .
While Bonso Electronics International 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.
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