Publicis Groupe (EPA:PUB) Has Some Way To Go To Become A Multi-Bagger

By
Simply Wall St
Published
October 09, 2021
ENXTPA:PUB
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Publicis Groupe (EPA:PUB) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Publicis Groupe is:

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

0.12 = €1.7b ÷ (€29b - €15b) (Based on the trailing twelve months to June 2021).

Thus, Publicis Groupe has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

View our latest analysis for Publicis Groupe

roce
ENXTPA:PUB Return on Capital Employed October 10th 2021

Above you can see how the current ROCE for Publicis Groupe compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Publicis Groupe here for free.

What Can We Tell From Publicis Groupe's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 27% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Publicis Groupe has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that Publicis Groupe has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In the end, Publicis Groupe has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 4.2% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know about the risks facing Publicis Groupe, we've discovered 4 warning signs that you should be aware of.

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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