PBT Group (JSE:PBG) Is Very Good At Capital Allocation

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in PBT Group's (JSE:PBG) returns on capital, so let's have a look.

What Is 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 PBT Group is:

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

0.36 = R133m ÷ (R495m - R123m) (Based on the trailing twelve months to September 2022).

Therefore, PBT Group has an ROCE of 36%. In absolute terms that's a great return and it's even better than the IT industry average of 25%.

View our latest analysis for PBT Group

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

SWOT Analysis for PBT Group

So How Is PBT Group's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at PBT Group. We found that the returns on capital employed over the last five years have risen by 3,225%. The company is now earning R0.4 per dollar of capital employed. In regards to capital employed, PBT Group appears to been achieving more with less, since the business is using 30% less capital to run its operation. PBT Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 25% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On PBT Group's ROCE

In a nutshell, we're pleased to see that PBT Group has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing PBT Group we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.