P/F Bakkafrost (OB:BAKKA) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at P/F Bakkafrost (OB:BAKKA), it didn't seem to tick all of these boxes.

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. 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)

0.081 = kr.1.1b ÷ (kr.15b - kr.919m) (Based on the trailing twelve months to March 2022).

Therefore, P/F Bakkafrost has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

View our latest analysis for P/F Bakkafrost

Above you can see how the current ROCE for P/F Bakkafrost 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 P/F Bakkafrost.

What Can We Tell From P/F Bakkafrost's ROCE Trend?

On the surface, the trend of ROCE at P/F Bakkafrost doesn't inspire confidence. To be more specific, ROCE has fallen from 31% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, P/F Bakkafrost has decreased its current liabilities to 6.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

In Conclusion...

While returns have fallen for P/F Bakkafrost in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 122% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in P/F Bakkafrost it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While P/F Bakkafrost 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.