Our Take On The Returns On Capital At Prodware (EPA:ALPRO)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Prodware (EPA:ALPRO) and its ROCE trend, we weren't exactly thrilled.

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 Prodware is:

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 12%.

Check out 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, you can check out the forecasts from the analysts covering Prodware here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Prodware doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.9% from 8.7% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 Bottom Line On Prodware's ROCE

To conclude, we've found that Prodware is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd 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.

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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