Investors Could Be Concerned With Prodware's (EPA:ALPRO) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Prodware (EPA:ALPRO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Prodware:

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

0.069 = €18m ÷ (€360m - €101m) (Based on the trailing twelve months to June 2020).

So, Prodware has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.

See our latest analysis for Prodware

Above you can see how the current ROCE for Prodware 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 Prodware.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Prodware, we didn't gain much confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 6.9%. However it looks like Prodware might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Prodware is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Prodware, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Prodware 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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