Here’s what to think about Bunzl’s (LON:BNZL) declining returns

When we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Firstly, we want to see something proven return on capital employed (ROCE) increases, and secondly, it grows base of the capital employed. Put simply, such companies are compounding machines, meaning they continually reinvest their profits at ever-increasing returns. Against this background, the ROCE of Bunzl (LON:BNZL) is looking good at the moment, so let’s see what the trend in returns can tell us.

Just to clarify in case you’re not sure, ROCE is a measure used to evaluate how much pre-tax income (as a percentage) a company generates from the capital invested in its business. Analysts use this formula to calculate it for Bunzl:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.16 = 823 million British pounds ÷ (9.3 billion British pounds – 4.1 billion British pounds) (Based on the last twelve months ended June 2024).

Therefore, Bunzl has a ROCE of 16%. In absolute terms, this is a fairly normal return and is reasonably close to the industry average of 14% for commercial distributors.

Check out our latest analysis for Bunzl

In the chart above, we measured Bunzl’s past ROCE compared to its previous performance, but the future is arguably more important. If you want, you can check out the forecasts from the analysts covering Bunzl free.

The ROCE trend is not particularly noticeable, but the returns are decent overall. The company has earned a consistent 16% over the last five years and the capital employed in the company has increased by 40% during this time. 16% is a fairly normal return and it’s reassuring to know that Bunzl has consistently earned this amount. Over long periods of time, such returns may not be too exciting, but if they remain consistent, they can pay dividends in terms of share price returns.

As a side note, Bunzl’s current liabilities are still quite high at 44% of total assets. This can entail certain risks, as the company is fundamentally dependent to a relatively large extent on its suppliers or other short-term creditors. While it’s not necessarily a bad thing, having this ratio lower can be beneficial.

The most important thing to remember is that Bunzl has demonstrated its ability to continually reinvest at respectable returns. So it’s no surprise that shareholders have received a respectable return of 88% by holding over the last five years. While the stock may be “more expensive” than before, we believe the strong fundamentals warrant further research into this stock.

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