We Like These Underlying Return On Capital Trends At Plexus Holdings (LON:POS)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Plexus Holdings (LON:POS) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Plexus Holdings, this is the formula:

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

0.00024 = UK£4.0k ÷ (UK£23m - UK£5.8m) (Based on the trailing twelve months to December 2023).

Thus, Plexus Holdings has an ROCE of 0.02%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 9.7%.

Check out our latest analysis for Plexus Holdings

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

What Can We Tell From Plexus Holdings' ROCE Trend?

Like most people, we're pleased that Plexus Holdings is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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 57%. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 26% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In the end, Plexus Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 62% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 4 warning signs we've spotted with Plexus Holdings (including 1 which is potentially serious) .

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.