Our Take On The Returns On Capital At Portmeirion Group (LON:PMP)

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Portmeirion Group (LON:PMP) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Portmeirion Group, this is the formula:

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

0.068 = UK£5.0m ÷ (UK£90m - UK£17m) (Based on the trailing twelve months to June 2020).

So, Portmeirion Group has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

See our latest analysis for Portmeirion Group

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 23% five years ago, while the business's capital employed increased by 109%. Usually this isn't ideal, but given Portmeirion Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Portmeirion Group might not have received a full period of earnings contribution from it.

The Bottom Line On Portmeirion Group's ROCE

Bringing it all together, while we're somewhat encouraged by Portmeirion Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. Therefore based on the analysis done in this article, we don't think Portmeirion Group has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Portmeirion Group you'll probably want to know about.

While Portmeirion Group 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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