If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Petrol d.d (LJSE:PETG), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Petrol d.d is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = €101m ÷ (€1.8b - €529m) (Based on the trailing twelve months to December 2020).
So, Petrol d.d has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.
View our latest analysis for Petrol d.d
Above you can see how the current ROCE for Petrol d.d 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 Petrol d.d.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Petrol d.d. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 8.0%. 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.
The Bottom Line
Long story short, while Petrol d.d has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 87% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Petrol d.d does come with some risks, and we've found 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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About LJSE:PETG
Petrol d.d
Through its subsidiaries, sells petroleum and other energy products in Slovenia and internationally.
Flawless balance sheet with solid track record and pays a dividend.
