Capital Allocation Trends At Priner Serviços Industriais (BVMF:PRNR3) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Priner Serviços Industriais (BVMF:PRNR3) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Priner Serviços Industriais, this is the formula:

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

0.13 = R$32m ÷ (R$358m - R$104m) (Based on the trailing twelve months to September 2021).

Therefore, Priner Serviços Industriais has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 10% it's much better.

Check out our latest analysis for Priner Serviços Industriais

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

What Does the ROCE Trend For Priner Serviços Industriais Tell Us?

When we looked at the ROCE trend at Priner Serviços Industriais, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 24% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Priner Serviços Industriais has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Priner Serviços Industriais is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 23% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Priner Serviços Industriais does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Priner Serviços Industriais isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.