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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at ProCook Group (LON:PROC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. Analysts use this formula to calculate it for ProCook Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = UK£1.1m ÷ (UK£54m - UK£19m) (Based on the trailing twelve months to October 2023).
Therefore, ProCook Group has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 14%.
Check out our latest analysis for ProCook Group
Above you can see how the current ROCE for ProCook Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for ProCook Group .
So How Is ProCook Group's ROCE Trending?
When we looked at the ROCE trend at ProCook Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like ProCook Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From ProCook Group's ROCE
Bringing it all together, while we're somewhat encouraged by ProCook Group's 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 13% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know more about ProCook Group, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.