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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Pollard Banknote (TSE:PBL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pollard Banknote, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CA$20m ÷ (CA$605m - CA$115m) (Based on the trailing twelve months to September 2024).
Therefore, Pollard Banknote has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.
See our latest analysis for Pollard Banknote
Above you can see how the current ROCE for Pollard Banknote compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Pollard Banknote .
What Does the ROCE Trend For Pollard Banknote Tell Us?
On the surface, the trend of ROCE at Pollard Banknote doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Pollard Banknote's ROCE
To conclude, we've found that Pollard Banknote is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.