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

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Pernod Ricard (EPA:RI), it didn't seem to tick all of these boxes.

What Is 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 Pernod Ricard:

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

0.11 = €3.3b ÷ (€38b - €6.9b) (Based on the trailing twelve months to June 2023).

Therefore, Pernod Ricard has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.7% generated by the Beverage industry.

View our latest analysis for Pernod Ricard

Above you can see how the current ROCE for Pernod Ricard compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pernod Ricard.

The Trend Of ROCE

Over the past five years, Pernod Ricard's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Pernod Ricard to be a multi-bagger going forward. This probably explains why Pernod Ricard is paying out 51% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

What We Can Learn From 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. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Pernod Ricard we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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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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.