In This Article:
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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Pebble Group (LON:PEBB) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Pebble Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = UK£7.7m ÷ (UK£122m - UK£27m) (Based on the trailing twelve months to June 2024).
So, Pebble Group has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 11%.
See our latest analysis for Pebble Group
Above you can see how the current ROCE for Pebble 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 Pebble Group .
So How Is Pebble Group's ROCE Trending?
When we looked at the ROCE trend at Pebble Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.1% from 15% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From Pebble Group's ROCE
We're a bit apprehensive about Pebble Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 70% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Pebble Group does have some risks though, and we've spotted 1 warning sign for Pebble Group that you might be interested in.