There Are Reasons To Feel Uneasy About B.O.S. Better Online Solutions' (NASDAQ:BOSC) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think B.O.S. Better Online Solutions (NASDAQ:BOSC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for B.O.S. Better Online Solutions:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.06 = US$960k ÷ (US$25m - US$8.7m) (Based on the trailing twelve months to June 2021).

Thus, B.O.S. Better Online Solutions has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Communications industry average of 8.0%.

See our latest analysis for B.O.S. Better Online Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for B.O.S. Better Online Solutions' ROCE against it's prior returns. If you'd like to look at how B.O.S. Better Online Solutions 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?

On the surface, the trend of ROCE at B.O.S. Better Online Solutions doesn't inspire confidence. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 6.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On B.O.S. Better Online Solutions' ROCE

Bringing it all together, while we're somewhat encouraged by B.O.S. Better Online Solutions' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing B.O.S. Better Online Solutions we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While B.O.S. Better Online Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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