Returns On Capital At PGG Wrightson (NZSE:PGW) Have Hit The Brakes

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at PGG Wrightson (NZSE:PGW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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 PGG Wrightson is:

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

0.054 = NZ$20m ÷ (NZ$660m - NZ$296m) (Based on the trailing twelve months to December 2024).

Thus, PGG Wrightson has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Food industry average of 9.6%.

See our latest analysis for PGG Wrightson

Historical performance is a great place to start when researching a stock so above you can see the gauge for PGG Wrightson's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of PGG Wrightson.

What Does the ROCE Trend For PGG Wrightson Tell Us?

The returns on capital haven't changed much for PGG Wrightson in recent years. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 24% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, PGG Wrightson has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Long story short, while PGG Wrightson has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing PGG Wrightson we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

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.