Pollard Banknote's (TSE:PBL) Returns On Capital Not Reflecting Well On The Business

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. Although, when we looked at Pollard Banknote (TSE:PBL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Pollard Banknote, this is the formula:

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

0.10 = CA$39m ÷ (CA$465m - CA$81m) (Based on the trailing twelve months to March 2021).

So, Pollard Banknote has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 7.4% it's much better.

Check out our latest analysis for Pollard Banknote

Above you can see how the current ROCE for Pollard Banknote 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 Pollard Banknote here for free.

How Are Returns Trending?

In terms of Pollard Banknote's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Pollard Banknote might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Pollard Banknote is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 697% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Pollard Banknote, we've discovered 4 warning signs that you should be aware of.

While Pollard Banknote isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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