Proactis (EPA:PROAC) Is Looking To Continue Growing Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Proactis' (EPA:PROAC) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Proactis is:

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

0.12 = €2.0m ÷ (€24m - €6.8m) (Based on the trailing twelve months to January 2022).

Therefore, Proactis has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 9.7%.

View our latest analysis for Proactis

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

So How Is Proactis' ROCE Trending?

We're pretty happy with how the ROCE has been trending at Proactis. The data shows that returns on capital have increased by 85% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In Conclusion...

From what we've seen above, Proactis has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 16% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Proactis (1 is significant) you should be aware of.

While Proactis 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.