Returns On Capital Are A Standout For Plascar Participações Industriais (BVMF:PLAS3)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Plascar Participações Industriais' (BVMF:PLAS3) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Plascar Participações Industriais:

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

0.25 = R$53m ÷ (R$667m - R$451m) (Based on the trailing twelve months to September 2023).

Thus, Plascar Participações Industriais has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

See our latest analysis for Plascar Participações Industriais

Historical performance is a great place to start when researching a stock so above you can see the gauge for Plascar Participações Industriais' ROCE against it's prior returns. If you'd like to look at how Plascar Participações Industriais has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Plascar Participações Industriais has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 25% on its capital. In addition to that, Plascar Participações Industriais is employing 29% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that Plascar Participações Industriais has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Plascar Participações Industriais' ROCE

Overall, Plascar Participações Industriais gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 4 warning signs we've spotted with Plascar Participações Industriais (including 3 which are concerning) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.