To avoid investing in a declining business, there are a few financial metrics that can provide early indications of aging. A potentially declining business often exhibits two trends, one come back on capital employed (ROCE) which is down, and a base capital employed, which is also down. This tells us that not only is the company reducing the size of its net assets, but its returns are also decreasing. In light of this, at a first glance at Bengal Energy (TSE:BNG), we’ve spotted signs that he might be in trouble, so let’s investigate.
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. To calculate this metric for Bengal Energy, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0045 = CA$199,000 ÷ (CA$46m – CA$2.2m) (Based on the last twelve months to June 2022).
So, Bengal Energy has a ROCE of 0.5%. In absolute terms, this is a poor performer and it also underperforms the oil and gas industry average by 18%.
Check out our latest analysis for Bengal Energy
Historical performance is a great starting point when researching a stock. So above you can see the gauge of Bengal Energy’s ROCE compared to its past returns. If you want to investigate more about Bengal Energy’s past, check out this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of Bengal Energy?
We are a bit worried about the trend in capital returns at Bengal Energy. Unfortunately, capital returns have declined from the 1.4% they were earning five years ago. And on the capital employed front, the company is using roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their margins from the competition. So, because these trends are generally not conducive to creating a multi-bagger, we wouldn’t hold our breath for Bengal Energy to become one if things continue as they have.
Furthermore, Bengal Energy did well to repay its current liabilities at 4.8% of total assets. This could partly explain why ROCE fell. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating a return on investment.
The basics of Bengal Energy’s ROCE
In summary, it is unfortunate that Bengal Energy generates lower returns from the same amount of capital. Investors did not like these developments, as the stock fell 20% from five years ago. Unless there is a shift to a more positive trajectory in these measures, we would look elsewhere.
Bengal Energy does come with some risk though, and we have spotted 4 warning signs for Bengal Energy that might interest you.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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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.
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