Will Photo-Me International (LON:PHTM) Multiply In Value Going Forward?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Photo-Me International (LON:PHTM), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Photo-Me International:

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

0.036 = UK£6.4m ÷ (UK£260m - UK£84m) (Based on the trailing twelve months to April 2020).

So, Photo-Me International has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 15%.

See our latest analysis for Photo-Me International

In the above chart we have measured Photo-Me International'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 Photo-Me International here for free.

What Can We Tell From Photo-Me International's ROCE Trend?

On the surface, the trend of ROCE at Photo-Me International doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.6% from 34% five years ago. 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.

The Bottom Line On Photo-Me International's ROCE

To conclude, we've found that Photo-Me International is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 61% 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.

If you'd like to know more about Photo-Me International, we've spotted 4 warning signs, and 1 of them is concerning.

While Photo-Me International 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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