What Should Investors Know About Pfleiderer Group Spólka Akcyjna’s (WSE:PFL) Return On Capital?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Pfleiderer Group Spólka Akcyjna (WSE:PFL).

If you purchase a PFL share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Pfleiderer Group Spólka Akcyjna’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Pfleiderer Group Spólka Akcyjna

Calculating Return On Capital Employed for PFL

Choosing to invest in Pfleiderer Group Spólka Akcyjna comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine Pfleiderer Group Spólka Akcyjna’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Pfleiderer Group Spólka Akcyjna’s ROCE for you below:

ROCE Calculation for PFL

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = €28m ÷ (€923m – €254m) = 4.2%

As you can see, PFL earned PLN4.2 from every PLN100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Pfleiderer Group Spólka Akcyjna is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

WSE:PFL Last Perf November 14th 18
WSE:PFL Last Perf November 14th 18

Why is this the case?

PFL doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of PFL’s ROCE and understand what is happening to the individual components. Three years ago, PFL’s ROCE was 14%, which means the company’s capital returns have worsened. In this time, earnings have fallen from €34m to €28m and capital employed has increased due to a hike in the level of total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

ROCE for PFL investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate PFL or move on to other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for PFL’s future growth? Take a look at our free research report of analyst consensus for PFL’s outlook.
  2. Valuation: What is PFL worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether PFL is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.