If you’re looking for a multibagger, there are a few things to keep in mind. Ideally, your business will see two trends. First, an increase in return on capital employed (ROCE), and second, an increase in the amount of capital employed. Simply put, this type of business is a compound interest machine, meaning you are continually reinvesting your earnings at an ever-higher rate of return. So I looked into Pets at Home Group (LON:PETS) and its ROCE trend, and I quite liked what I saw.
About Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (return) on the capital employed in the business. The formula for this calculation for the Pets at Home group is:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.098 = GBP 132m ÷ (GBP 1.7b – GBP 341m) (Based on the trailing twelve months to March 2024).
Therefore, Pets at Home Group’s ROCE is 9.8%. This alone is a low return on equity, but it is comparable to the industry’s average return of 9.8%.
Check out our latest analysis for Pets at Home Group.
LSE:PETS Return on Capital Employed (October 24, 2024)
In the chart above, we’ve measured Pets at Home Group’s previous ROCE against its previous performance, but the future is probably more important. If you would like, you can check out the forecasts from the analysts covering Pets at Home Group for free.
What ROCE trends tell us
Pets at Home Group did not disappoint with its ROCE growth. Looking at the data, we can see that while the capital employed in the business has remained relatively flat, the ROCE generated has increased by 46% over the past five years. Essentially, the business is generating higher profits from the same amount of capital, which is evidence that the company is becoming more efficient. However, this is worth considering more deeply. Because while it’s great to see more efficiency in your business, it can also mean you lack areas to invest internally for organic growth going forward.
HomeGroup’s handling of pets ROCE
As discussed above, Pets at Home Group appears to be becoming increasingly adept at generating profits, as profits (before interest and tax) are increasing, although capital employed remains flat. is. It’s safe to say that investors are beginning to recognize these changes, as the company’s stock has returned a solid 74% to shareholders over the past five years. With that in mind, we think the stock is worth further consideration, as it could have a bright future ahead if Pets at Home Group can maintain this trend.
On the other side of ROCE, you need to consider valuation. That’s why we have a free intrinsic value estimate for PETS on our platform that is definitely worth checking out.
If you like investing in solid companies, check out this free list of companies with strong balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
