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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Parkland (TSE:PKI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Parkland, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = CA$802m ÷ (CA$14b - CA$3.5b) (Based on the trailing twelve months to September 2024).
Thus, Parkland has an ROCE of 7.7%. On its own, that's a low figure but it's around the 9.5% average generated by the Oil and Gas industry.
See our latest analysis for Parkland
Above you can see how the current ROCE for Parkland compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Parkland for free.
So How Is Parkland's ROCE Trending?
On the surface, the trend of ROCE at Parkland doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.7% from 11% 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.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Parkland have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 4.0% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Parkland (of which 1 shouldn't be ignored!) that you should know about.