Burberry Group (LON:BRBY) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Burberry Group (LON:BRBY), we don't think it's current trends fit the mold of a multi-bagger.

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

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

0.17 = UK£418m ÷ (UK£3.4b - UK£857m) (Based on the trailing twelve months to March 2024).

Thus, Burberry Group has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 12% it's much better.

See our latest analysis for Burberry Group

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

So How Is Burberry Group's ROCE Trending?

When we looked at the ROCE trend at Burberry Group, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 17%. However it looks like Burberry Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Burberry Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 3 warning signs for Burberry Group that we think you should be aware of.

While Burberry 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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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.