Pollard Banknote (TSE:PBL) hopes to turn its returns into capital

What trends should we look for if we want to identify stocks that can multiply in value over the long term? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. However, after investigating Ticket Pollard (TSE:PBL), we don’t think current trends fit the mold of a multi-bagger.

Return on capital employed (ROCE): what is it?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Pollard Banknote, here is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.054 = C$21 million ÷ (C$471 million – C$89 million) (Based on the last twelve months to June 2022).

Thereby, Pollard Banknote has a ROCE of 5.4%. In absolute terms, this is a weak return and it is also below the hotel industry average of 9.4%.

Check out our latest analysis for Pollard Banknote

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In the chart above, we measured Pollard Banknote’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Pollard Banknote.

What can we say about the Pollard Banknote ROCE trend?

When we looked at the ROCE trend at Pollard Banknote, we didn’t gain much confidence. To be more specific, ROCE has fallen by 19% over the past five years. However, it looks like Pollard Banknote could reinvest for long-term growth, because while capital employed has increased, the company’s sales haven’t changed much over the past 12 months. It’s worth keeping an eye on the company’s earnings going forward to see if those investments end up contributing to the bottom line.

Our view on Pollard Banknote’s ROCE

In summary, while we are somewhat encouraged by Pollard Banknote’s reinvestment in its own business, we are aware that returns are diminishing. Unsurprisingly, the stock has only gained 17% over the past five years, potentially indicating that investors are taking this into account going forward. Therefore, if you are looking for a multi-bagger, we suggest you consider other options.

Pollard Banknote does come with some risks though, and we have spotted 3 warning signs for Pollard Banknote that might interest you.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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