Return Trends At Pernod Ricard (EPA:RI) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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?

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)

0.097 = €3.1b ÷ (€39b - €7.2b) (Based on the trailing twelve months to June 2024).

So, Pernod Ricard has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Beverage industry average of 7.7%.

See 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 analyst report for Pernod Ricard .

So How Is Pernod Ricard's ROCE Trending?

There are better returns on capital out there than what we're seeing at Pernod Ricard. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 9.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Pernod Ricard has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Pernod Ricard has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Pernod Ricard (1 can't be ignored) you should be aware of.

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.