Returns On Capital At Pirelli & C (BIT:PIRC) Have Hit The Brakes

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Pirelli & C (BIT:PIRC), it didn't seem to tick all of these boxes.

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

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 Pirelli & C is:

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

0.084 = €846m ÷ (€14b - €3.7b) (Based on the trailing twelve months to June 2023).

So, Pirelli & C has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 14%.

View 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.

The Trend Of ROCE

There hasn't been much to report for Pirelli & C's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Pirelli & C to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Pirelli & C has been paying out a decent 30% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line On Pirelli & C's ROCE

In a nutshell, Pirelli & C has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 24% 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.

Pirelli & C does have some risks though, and we've spotted 2 warning signs for Pirelli & C that you might be interested in.

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.