Bakkavor Group's (LON:BAKK) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at Bakkavor Group (LON:BAKK) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Bakkavor Group is:

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

0.073 = UK£78m ÷ (UK£1.5b - UK£478m) (Based on the trailing twelve months to December 2022).

Therefore, Bakkavor Group has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.9% average generated by the Food industry.

Check out our latest analysis for Bakkavor Group

In the above chart we have measured Bakkavor Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Bakkavor Group doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Bakkavor Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bakkavor Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 39% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Bakkavor Group does come with some risks, and we've found 4 warning signs that you should be aware of.

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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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.