Investors Met With Slowing Returns on Capital At Pernod Ricard (EPA:RI)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Pernod Ricard (EPA:RI) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Pernod Ricard:

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

0.075 = €2.1b ÷ (€32b - €4.5b) (Based on the trailing twelve months to December 2020).

Thus, Pernod Ricard has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 3.6% generated by the Beverage industry, it's much better.

View our latest analysis for Pernod Ricard

In the above chart we have measured Pernod Ricard'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.

The Trend Of ROCE

There hasn't been much to report for Pernod Ricard's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Pernod Ricard in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why Pernod Ricard is paying out 44% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Our Take On Pernod Ricard's ROCE

In summary, Pernod Ricard isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 105% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Pernod Ricard we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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