There Are Reasons To Feel Uneasy About Priner Serviços Industriais' (BVMF:PRNR3) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

Understanding 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 Priner Serviços Industriais, this is the formula:

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

0.11 = R$32m ÷ (R$410m - R$127m) (Based on the trailing twelve months to March 2022).

Therefore, Priner Serviços Industriais has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Commercial Services industry.

Check out our latest analysis for Priner Serviços Industriais

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Can We Tell From Priner Serviços Industriais' ROCE Trend?

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 11% from 29% 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 related note, Priner Serviços Industriais has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Priner Serviços Industriais, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Priner Serviços Industriais 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.

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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.