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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Pernod Ricard (EPA:RI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Our free stock report includes 4 warning signs investors should be aware of before investing in Pernod Ricard. Read for free now.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Pernod Ricard is:

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

0.089 = €2.9b ÷ (€40b - €6.8b) (Based on the trailing twelve months to December 2024).

So, Pernod Ricard has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 5.0% generated by the Beverage industry, it's much better.

See 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 analyst report for Pernod Ricard .

The Trend Of ROCE

Things have been pretty stable at Pernod Ricard, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. 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. With fewer investment opportunities, it makes sense that Pernod Ricard has been paying out a decent 57% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among 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. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Pernod Ricard has the makings of a multi-bagger.

If you'd like to know more about Pernod Ricard, we've spotted 4 warning signs, and 1 of them is a bit concerning.

While Pernod Ricard 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.