Premier Fishing & Brands' (JSE:PFB) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Premier Fishing & Brands (JSE:PFB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Premier Fishing & Brands:

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

0.012 = R11m ÷ (R999m - R74m) (Based on the trailing twelve months to August 2021).

So, Premier Fishing & Brands has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

View our latest analysis for Premier Fishing & Brands

Historical performance is a great place to start when researching a stock so above you can see the gauge for Premier Fishing & Brands' ROCE against it's prior returns. If you're interested in investigating Premier Fishing & Brands' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Premier Fishing & Brands Tell Us?

In terms of Premier Fishing & Brands' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% 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, Premier Fishing & Brands has decreased its current liabilities to 7.4% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Premier Fishing & Brands' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Premier Fishing & Brands is reinvesting for growth and has higher sales as a result. But since the stock has dived 82% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

One final note, you should learn about the 4 warning signs we've spotted with Premier Fishing & Brands (including 3 which are potentially serious) .

While Premier Fishing & Brands 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.