Pollard Banknote (TSE:PBL) Will Want To Turn Around Its Return Trends

By
Simply Wall St
Published
May 12, 2022
TSX:PBL
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Pollard Banknote (TSE:PBL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Pollard Banknote:

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

0.075 = CA$28m ÷ (CA$461m - CA$91m) (Based on the trailing twelve months to December 2021).

Therefore, Pollard Banknote has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Hospitality industry average of 8.7%.

View our latest analysis for Pollard Banknote

roce
TSX:PBL Return on Capital Employed May 12th 2022

In the above chart we have measured Pollard Banknote's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at Pollard Banknote doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Pollard Banknote's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Pollard Banknote is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 95% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Pollard Banknote, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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