We Like These Underlying Return On Capital Trends At Pirelli & C (BIT:PIRC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Pirelli & C (BIT:PIRC) and its trend of ROCE, we really liked what we saw.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.15 = €947m ÷ (€8.8b - €2.6b) (Based on the trailing twelve months to December 2024).

Therefore, Pirelli & C has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Auto Components industry.

Check out our latest analysis for Pirelli & C

In the above chart we have measured Pirelli & C'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 analyst report for Pirelli & C .

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

You'd find it hard not to be impressed with the ROCE trend at Pirelli & C. The figures show that over the last five years, returns on capital have grown by 111%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 42% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Pirelli & C may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In summary, it's great to see that Pirelli & C has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 69% return over the last five years. In light of that, we think it's worth looking further into this stock because if Pirelli & C can keep these trends up, it could have a bright future ahead.

Like most companies, Pirelli & C does come with some risks, and we've found 1 warning sign that you should be aware of.

While Pirelli & C isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.