To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Prosegur Compañía de Seguridad (BME:PSG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 Prosegur Compañía de Seguridad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = €140m ÷ (€3.9b - €1.3b) (Based on the trailing twelve months to December 2020).
Therefore, Prosegur Compañía de Seguridad has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.
Above you can see how the current ROCE for Prosegur Compañía de Seguridad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Prosegur Compañía de Seguridad here for free.
The Trend Of ROCE
In terms of Prosegur Compañía de Seguridad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 5.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.
Our Take On Prosegur Compañía de Seguridad's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Prosegur Compañía de Seguridad have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Prosegur Compañía de Seguridad we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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