Capital Allocation Trends At Picanol (EBR:PIC) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Picanol (EBR:PIC), it didn't seem to tick all of these boxes.

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 Picanol:

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

0.074 = €170m ÷ (€2.8b - €476m) (Based on the trailing twelve months to December 2020).

Therefore, Picanol has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.3%.

Check out our latest analysis for Picanol

Above you can see how the current ROCE for Picanol compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Picanol here for free.

What Does the ROCE Trend For Picanol Tell Us?

When we looked at the ROCE trend at Picanol, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.4% from 19% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

What We Can Learn From Picanol's ROCE

Bringing it all together, while we're somewhat encouraged by Picanol's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you're still interested in Picanol it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Picanol 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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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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