Here's What's Concerning About Burberry Group's (LON:BRBY) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Burberry Group (LON:BRBY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Burberry Group is:

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

0.15 = UK£415m ÷ (UK£3.5b - UK£703m) (Based on the trailing twelve months to March 2021).

Thus, Burberry Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Luxury industry.

Check out 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 here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Burberry Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 23% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Burberry Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Burberry Group have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 112%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Burberry Group does have some risks though, and we've spotted 2 warning signs for Burberry Group that you might be interested in.

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. 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.
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