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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Burberry Group (LON:BRBY), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is 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 Burberry Group is:

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

0.22 = UK£634m ÷ (UK£3.7b - UK£829m) (Based on the trailing twelve months to April 2023).

Therefore, Burberry Group has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.

View our latest analysis for Burberry Group

In the above chart we have measured Burberry Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Burberry Group here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Burberry Group doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 28%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Burberry Group's ROCE

To conclude, we've found that Burberry Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 5.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Burberry Group that you might find interesting.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.