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The Trends At City Pub Group (LON:CPC) That You Should Know About

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at City Pub Group (LON:CPC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for City Pub Group:

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

0.0053 = UK£761k ÷ (UK£151m - UK£8.5m) (Based on the trailing twelve months to June 2020).

So, City Pub Group has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.8%.

Check out our latest analysis for City Pub Group

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In the above chart we have measured City Pub Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From City Pub Group's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 1.9% five years ago, while capital employed has grown 342%. That being said, City Pub Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence City Pub Group might not have received a full period of earnings contribution from it.

What We Can Learn From City Pub Group's ROCE

We're a bit apprehensive about City Pub Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 71% in the last year. Unless these trends revert to a more positive trajectory, we would look elsewhere.

If you want to know some of the risks facing City Pub Group we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While City Pub Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.