If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Pick n Pay Stores (JSE:PIK), we don't think it's current trends fit the mold of a multi-bagger.
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 Pick n Pay Stores:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = R1.0b ÷ (R46b - R22b) (Based on the trailing twelve months to August 2024).
Therefore, Pick n Pay Stores has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 18%.
View our latest analysis for Pick n Pay Stores
In the above chart we have measured Pick n Pay Stores' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Pick n Pay Stores for free.
What Does the ROCE Trend For Pick n Pay Stores Tell Us?
Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 42%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Pick n Pay Stores might not have received a full period of earnings contribution from it.
On a side note, Pick n Pay Stores' current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Pick n Pay Stores' ROCE
Bringing it all together, while we're somewhat encouraged by Pick n Pay Stores' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.