Baby Bunting Group (ASX:BBN) Will Want To Turn Around Its Return Trends

Yahoo

15-02-2025

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Baby Bunting Group (ASX:BBN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Baby Bunting Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = AU$17m ÷ (AU$332m - AU$91m) (Based on the trailing twelve months to June 2024).
Thus, Baby Bunting Group has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 17%.
View our latest analysis for Baby Bunting Group
Above you can see how the current ROCE for Baby Bunting Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Baby Bunting Group .
When we looked at the ROCE trend at Baby Bunting Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. 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.
To conclude, we've found that Baby Bunting Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Like most companies, Baby Bunting Group does come with some risks, and we've found 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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