Returns Are Gaining Momentum At Prologue (EPA:ALPRG)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Prologue (EPA:ALPRG) so let's look a bit deeper.

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 Prologue is:

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

0.033 = €1.9m ÷ (€86m - €29m) (Based on the trailing twelve months to December 2022).

So, Prologue has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.

Check out our latest analysis for Prologue

Above you can see how the current ROCE for Prologue compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Prologue.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Prologue is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Prologue is utilizing 53% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 34%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Prologue has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Prologue's ROCE

Long story short, we're delighted to see that Prologue's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 61% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Prologue you'll probably want to know about.

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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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.