Prodways Group (EPA:PWG) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So on that note, Prodways Group (EPA:PWG) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Prodways Group is:

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

0.023 = €2.1m ÷ (€119m - €29m) (Based on the trailing twelve months to June 2023).

So, Prodways Group has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.5%.

See our latest analysis for Prodways Group

Above you can see how the current ROCE for Prodways Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Prodways Group has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.3%, which is always encouraging. While returns have increased, the amount of capital employed by Prodways Group has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Prodways Group's ROCE

To bring it all together, Prodways Group has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 4 warning signs with Prodways Group and understanding these should be part of your investment process.

While Prodways Group 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.