Pirelli & C (BIT:PIRC) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Pirelli & C (BIT:PIRC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Pirelli & C, this is the formula:

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

0.081 = €830m ÷ (€14b - €3.6b) (Based on the trailing twelve months to March 2023).

Therefore, Pirelli & C has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

See our latest analysis for Pirelli & C

Above you can see how the current ROCE for Pirelli & C 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 Pirelli & C.

What Does the ROCE Trend For Pirelli & C Tell Us?

Things have been pretty stable at Pirelli & C, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Pirelli & C doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Pirelli & C's ROCE

We can conclude that in regards to Pirelli & C's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Pirelli & C has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Pirelli & C that you might find interesting.

While Pirelli & C 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.