Boston Pizza Royalties Income Fund (TSE:BPF.UN) Hasn't Managed To Accelerate Its Returns
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Boston Pizza Royalties Income Fund (TSE:BPF.UN), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Boston Pizza Royalties Income Fund, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CA$48m ÷ (CA$414m - CA$411k) (Based on the trailing twelve months to September 2023).
Therefore, Boston Pizza Royalties Income Fund has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Hospitality industry.
View our latest analysis for Boston Pizza Royalties Income Fund
In the above chart we have measured Boston Pizza Royalties Income Fund'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 Boston Pizza Royalties Income Fund here for free.
What Can We Tell From Boston Pizza Royalties Income Fund's ROCE Trend?
Over the past five years, Boston Pizza Royalties Income Fund's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Boston Pizza Royalties Income Fund doesn't end up being a multi-bagger in a few years time.
What We Can Learn From Boston Pizza Royalties Income Fund's ROCE
In a nutshell, Boston Pizza Royalties Income Fund has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing to note, we've identified 2 warning signs with Boston Pizza Royalties Income Fund and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
