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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Brighton Pier Group (LON:PIER), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Brighton Pier Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0051 = UK£251k ÷ (UK£60m - UK£11m) (Based on the trailing twelve months to June 2024).
Thus, Brighton Pier Group has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.5%.
View our latest analysis for Brighton Pier Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Brighton Pier Group's ROCE against it's prior returns. If you'd like to look at how Brighton Pier Group has performed in the past in other metrics, you can view this free graph of Brighton Pier Group's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Brighton Pier Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 9.6% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
In Conclusion...
In summary, we're somewhat concerned by Brighton Pier Group's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Brighton Pier Group (of which 1 is a bit concerning!) that you should know about.