The Returns On Capital At P/F Bakkafrost (OB:BAKKA) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at P/F Bakkafrost (OB:BAKKA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.039 = kr.640m ÷ (kr.17b - kr.987m) (Based on the trailing twelve months to September 2023).

Therefore, P/F Bakkafrost has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.7%.

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 to see what analysts are forecasting going forward, you should check out our free report for P/F Bakkafrost.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at P/F Bakkafrost doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 21% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On P/F Bakkafrost's ROCE

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 followed suit returning a meaningful 45% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

P/F Bakkafrost does have some risks though, and we've spotted 1 warning sign for P/F Bakkafrost that you might be interested in.

While P/F Bakkafrost 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.