Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. That's why when we briefly looked at Precia's (EPA:PREC) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Precia is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €13m ÷ (€143m - €46m) (Based on the trailing twelve months to December 2020).
Therefore, Precia has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 3.2% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Precia's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Precia, check out these free graphs here.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 52% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Precia has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Precia's ROCE
To sum it up, Precia has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 115% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing Precia, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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