Stock Analysis

Returns On Capital Signal Tricky Times Ahead For PageGroup (LON:PAGE)

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LSE:PAGE
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at PageGroup (LON:PAGE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on PageGroup is:

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

0.042 = UK£17m ÷ (UK£630m - UK£229m) (Based on the trailing twelve months to December 2020).

So, PageGroup has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.

View our latest analysis for PageGroup

roce
LSE:PAGE Return on Capital Employed July 28th 2021

Above you can see how the current ROCE for PageGroup 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 PageGroup here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at PageGroup doesn't inspire confidence. To be more specific, ROCE has fallen from 39% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by PageGroup's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 121% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for PageGroup you'll probably want to know about.

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