Will Pescanova's (BME:PVA) Growth In ROCE Persist?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Pescanova (BME:PVA) so let's look a bit deeper.

What is 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 Pescanova, this is the formula:

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

0.0027 = €122k ÷ (€47m - €790k) (Based on the trailing twelve months to November 2020).

Therefore, Pescanova has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Food industry average of 8.1%.

See our latest analysis for Pescanova

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Pescanova has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Pescanova's ROCE Trend?

Pescanova has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 0.3% on its capital. Not only that, but the company is utilizing 36% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Pescanova has decreased current liabilities to 1.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Pescanova has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Overall, Pescanova gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 38% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 4 warning signs with Pescanova (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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