If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at PUMA’s (ETR:PUM) ROCE trend, we were pretty happy with what we saw.
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for PUMA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = €598m ÷ (€7.0b – €2.9b) (Based on the trailing twelve months to June 2024).
Therefore, PUMA has an ROCE of 15%. On its own, that’s a standard return, however it’s much better than the 12% generated by the Luxury industry.
Check out our latest analysis for PUMA
In the above chart we have measured PUMA’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering PUMA for free.
While the returns on capital are good, they haven’t moved much. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, PUMA’s current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The main thing to remember is that PUMA has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 32%, so the decline might provide an opening. That’s why we think it’d be worthwhile to look further into this stock given the fundamentals are appealing.
PUMA does have some risks though, and we’ve spotted 1 warning sign for PUMA that you might be interested in.