Bakkavor Group (LON:BAKK) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Bakkavor Group (LON:BAKK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Bakkavor Group is:

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

0.081 = UK£84m ÷ (UK£1.4b - UK£414m) (Based on the trailing twelve months to December 2020).

So, Bakkavor Group has an ROCE of 8.1%. On its own, that's a low figure but it's around the 8.6% average generated by the Food industry.

Check out our latest analysis for Bakkavor Group

Above you can see how the current ROCE for Bakkavor Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bakkavor Group.

So How Is Bakkavor Group's ROCE Trending?

When we looked at the ROCE trend at Bakkavor Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Bakkavor Group's ROCE

To conclude, we've found that Bakkavor Group is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 18% 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 want to continue researching Bakkavor Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Bakkavor Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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