Returns On Capital Are Showing Encouraging Signs At Pierre et Vacances (EPA:VAC)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Pierre et Vacances (EPA:VAC) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Pierre et Vacances:

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

0.077 = €223m ÷ (€4.2b - €1.3b) (Based on the trailing twelve months to March 2024).

Thus, Pierre et Vacances has an ROCE of 7.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

Check out our latest analysis for Pierre et Vacances

In the above chart we have measured Pierre et Vacances' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Pierre et Vacances for free.

What Does the ROCE Trend For Pierre et Vacances Tell Us?

We're delighted to see that Pierre et Vacances is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.7% on its capital. In addition to that, Pierre et Vacances is employing 407% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Pierre et Vacances has decreased current liabilities to 31% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Pierre et Vacances' ROCE

Long story short, we're delighted to see that Pierre et Vacances' reinvestment activities have paid off and the company is now profitable. And since the stock has dived 72% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know about the risks facing Pierre et Vacances, we've discovered 1 warning sign that you should be aware of.

While Pierre et Vacances 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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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.