Pittards (LON:PTD) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Pittards (LON:PTD) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Pittards:

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

0.066 = UK£1.1m ÷ (UK£29m - UK£13m) (Based on the trailing twelve months to June 2022).

Thus, Pittards has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

View our latest analysis for Pittards

Above you can see how the current ROCE for Pittards 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 report for Pittards.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Pittards. We found that the returns on capital employed over the last five years have risen by 232%. The company is now earning UK£0.07 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 29% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a separate but related note, it's important to know that Pittards has a current liabilities to total assets ratio of 45%, 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 Bottom Line

In a nutshell, we're pleased to see that Pittards has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 87% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing: We've identified 6 warning signs with Pittards (at least 3 which are concerning) , and understanding them would certainly be useful.

While Pittards may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.