The Trends At Premier Fishing & Brands (JSE:PFB) That You Should Know About

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Premier Fishing & Brands (JSE:PFB), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 = R12m ÷ (R1.0b - R74m) (Based on the trailing twelve months to August 2020).

Thus, 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 13%.

Check out our latest analysis for Premier Fishing & Brands

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Premier Fishing & Brands, check out these free graphs here.

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

On the surface, the trend of ROCE at Premier Fishing & Brands doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 1.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Premier Fishing & Brands has done well to pay down its current liabilities to 7.2% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, we're somewhat concerned by Premier Fishing & Brands' diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 73% over the last three years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Premier Fishing & Brands does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Premier Fishing & Brands 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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