The Returns At Pharmocann Global (TLV:PMCN) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Pharmocann Global (TLV:PMCN), it does have a high ROCE right now, but lets see how returns are trending.

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 Pharmocann Global:

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

0.20 = ₪9.2m ÷ (₪50m - ₪5.3m) (Based on the trailing twelve months to June 2020).

Therefore, Pharmocann Global has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 13%.

See our latest analysis for Pharmocann Global

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Pharmocann Global has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Pharmocann Global's ROCE Trend?

On the surface, the trend of ROCE at Pharmocann Global doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 56% where it was two years ago. 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.

On a related note, Pharmocann Global has decreased its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Pharmocann Global. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Pharmocann Global does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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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