Return Trends At Parkmead Group (LON:PMG) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Parkmead Group (LON:PMG) 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. To calculate this metric for Parkmead Group, this is the formula:

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

0.06 = UK£1.3m ÷ (UK£27m - UK£4.9m) (Based on the trailing twelve months to June 2024).

Thus, Parkmead Group has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.6%.

View our latest analysis for Parkmead Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkmead Group's ROCE against it's prior returns. If you're interested in investigating Parkmead Group's past further, check out this free graph covering Parkmead Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Parkmead Group Tell Us?

Over the past five years, Parkmead Group's ROCE has remained relatively flat while the business is using 71% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 18% of total assets, this reported ROCE would probably be less than6.0% because total capital employed would be higher.The 6.0% ROCE could be even lower if current liabilities weren't 18% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line

Overall, we're not ecstatic to see Parkmead Group reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 69% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Parkmead Group we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.