When it comes to identifying stocks that can multiply in value over the long term, there are certain trends that we should be on the lookout for. Ideally, a business will show two key trends: firstly, a growing return on capital employed (ROCE), and secondly, an increasing amount of capital employed. This demonstrates that the company is reinvesting profits at increasing rates of return.
However, after investigating Brighton Pier Group (LON: PIER), we don’t think its current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who are not familiar with ROCE, 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, we use the following formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Using data from the trailing twelve months to June 2024, we get:
0.0051 = UK£251k ÷ (UK£60m – UK£11m)
This gives us an ROCE of 0.5% for Brighton Pier Group.
Unfortunately, that’s a low return and it under-performs the Hospitality industry average of 7.5%.
View our latest analysis for Brighton Pier Group
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.
Not only that, but revenue has dropped while employing more capital. We’d be cautious about this development because it could mean that the business is losing its competitive advantage or market share. While more money is being put into ventures, it’s actually producing a lower return – ‘less bang for their buck’ per se.
Investor Sentiment
Investors haven’t taken kindly to these developments, since the stock has declined 42% from where it was five years ago.
Risks and Warning Signs
Since virtually every company faces some risks, it’s worth knowing what they are. We’ve spotted two warning signs for Brighton Pier Group (of which one is a bit concerning!) that you should know about:
- 1: A high level of debt – this can increase the risk of insolvency and may weaken the balance sheet
- 2: A low return on equity (ROE) – this could be a sign that the company is not generating enough profits from its assets
Conclusion
In summary, we’re somewhat concerned by Brighton Pier Group’s diminishing returns on increasing amounts of capital. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
Additional Resources
For those who like to invest in solid companies with high returns on equity (ROE) and solid balance sheets, check out this free list of companies.
We’re a dedicated team of analysts and writers who aim to provide long-term focused analysis driven by fundamental data. We do not offer investment advice and the information we provide should not be considered as such.
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