Capital Allocation Trends At Prosegur Compañía de Seguridad (BME:PSG) 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Prosegur Compañía de Seguridad (BME:PSG) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Prosegur Compañía de Seguridad, this is the formula:

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

0.049 = €129m ÷ (€3.8b - €1.2b) (Based on the trailing twelve months to March 2021).

So, Prosegur Compañía de Seguridad has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10%.

Check out our latest analysis for Prosegur Compañía de Seguridad

In the above chart we have measured Prosegur Compañía de Seguridad'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.

The Trend Of ROCE

When we looked at the ROCE trend at Prosegur Compañía de Seguridad, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Prosegur Compañía de Seguridad's ROCE

We're a bit apprehensive about Prosegur Compañía de Seguridad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 34% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Prosegur Compañía de Seguridad (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Prosegur Compañía de Seguridad 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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