Prismaflex International (EPA:ALPRI) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Prismaflex International's (EPA:ALPRI) returns on capital, so let's have a look.

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. To calculate this metric for Prismaflex International, this is the formula:

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

0.0084 = €195k ÷ (€44m - €20m) (Based on the trailing twelve months to September 2021).

So, Prismaflex International has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Media industry average of 14%.

View our latest analysis for Prismaflex International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Prismaflex International's ROCE against it's prior returns. If you're interested in investigating Prismaflex International's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Prismaflex International Tell Us?

Prismaflex International has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 0.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Prismaflex International is utilizing 24% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Prismaflex International's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Long story short, we're delighted to see that Prismaflex International's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 35% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Prismaflex International we've found 2 warning signs (1 doesn't sit too well with us!) 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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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.