There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Proactis (EPA:PROAC) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Proactis:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = €555k ÷ (€23m - €6.8m) (Based on the trailing twelve months to January 2021).
So, Proactis has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Software industry average of 9.4%.
View our latest analysis for Proactis
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Proactis, check out these free graphs here.
How Are Returns Trending?
Like most people, we're pleased that Proactis is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 3.4% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 29%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Key Takeaway
In a nutshell, we're pleased to see that Proactis has been able to generate higher returns from less capital. Considering the stock has delivered 17% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to continue researching Proactis, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Proactis isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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About ENXTPA:PROAC
Low and slightly overvalued.
