Some Investors May Be Worried About Picanol's (EBR:PIC) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Picanol (EBR:PIC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Picanol is:

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

0.091 = €212m ÷ (€2.9b - €548m) (Based on the trailing twelve months to June 2021).

Therefore, Picanol has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 10%.

See 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.

How Are Returns Trending?

On the surface, the trend of ROCE at Picanol doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.1% from 23% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Picanol. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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.

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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