Here's What's Concerning About Bakkavor Group's (LON:BAKK) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Bakkavor Group (LON:BAKK), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.073 = 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%. Ultimately, that's a low return and it under-performs the Food industry average of 9.2%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Bakkavor Group.

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%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Bakkavor Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 31% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Bakkavor Group does have some risks though, and we've spotted 4 warning signs for Bakkavor Group that you might be interested in.

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.