P/F Bakkafrost (OB:BAKKA) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at P/F Bakkafrost (OB:BAKKA), it didn't seem to tick all of these boxes.

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

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 P/F Bakkafrost:

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

0.11 = kr.1.8b ÷ (kr.16b - kr.638m) (Based on the trailing twelve months to September 2022).

Thus, P/F Bakkafrost has an ROCE of 11%. In isolation, that's a pretty standard return but against the Food industry average of 15%, it's not as good.

Check out our latest analysis for P/F Bakkafrost

In the above chart we have measured P/F Bakkafrost's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering P/F Bakkafrost here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at P/F Bakkafrost, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, P/F Bakkafrost has done well to pay down its current liabilities to 3.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that P/F Bakkafrost is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 103% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

While P/F Bakkafrost doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.