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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Park & Bellheimer (FRA:PKB) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Park & Bellheimer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = €2.3m ÷ (€38m - €15m) (Based on the trailing twelve months to June 2023).
Therefore, Park & Bellheimer has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 5.9% generated by the Beverage industry, it's much better.
Check out our latest analysis for Park & Bellheimer
Historical performance is a great place to start when researching a stock so above you can see the gauge for Park & Bellheimer's ROCE against it's prior returns. If you'd like to look at how Park & Bellheimer has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Park & Bellheimer Tell Us?
Park & Bellheimer is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 192% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 39% 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.