Beware of Pick n Pay stores (JSE: PIK) and its returns on capital

If you are looking for a multi-bagger, there are a few things to look out for. Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigation Pick n Pay stores (JSE: PIK), we don’t think the current trends fit the mold of a multi-bagger.

What is Return on Employee Capital (ROCE)?

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Pick n Pay stores, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.16 = R2.9b (R38b – R20b) (Based on the last twelve months up to February 2021).

So, Pick n Pay Stores has a ROCE of 16%. This is a fairly standard return and it is in line with the industry average of 16%.

Check out our latest review for Pick n Pay stores

JSE: PIK Return on capital employed on September 24, 2021

In the chart above, we’ve measured Pick n Pay Stores past ROCE versus past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

What does the ROCE trend tell us for Pick n Pay stores?

On the surface, the ROCE trend in Pick n Pay stores does not inspire confidence. About five years ago, returns on capital were 29%, but since then they have fallen to 16%. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It may take some time for the business to begin to see a change in the benefits of these investments.

On a related note, Pick n Pay Stores reduced its current liabilities to 53% of total assets. This could partly explain the drop in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE. Either way, they’re still at a fairly high level, so we’d like to see them drop further if possible.

The ROCE of our Pick n Pay stores

In conclusion, we have seen that the Pick n Pay stores are reinvesting in the business, but the returns are declining. Plus, the total shareholder return for the past five years has been stable, which isn’t too surprising. Either way, the stock lacks the characteristics of a multi-bagger discussed above, so if that’s what you’re looking for, we think you might have better luck elsewhere.

One more thing, we spotted 1 warning sign opposite Pick n Pay stores that you might find interesting.

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