Primotec Group (TLV:PRMG) May Have Issues Allocating Its Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Primotec Group (TLV:PRMG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Primotec Group:

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

0.10 = ₪18m ÷ (₪290m - ₪114m) (Based on the trailing twelve months to September 2023).

Therefore, Primotec Group has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Household Products industry average of 8.4% it's much better.

Check out our latest analysis for Primotec Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Primotec Group's ROCE against it's prior returns. If you'd like to look at how Primotec Group has performed in the past in other metrics, you can view this free graph of Primotec Group's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Primotec Group, we didn't gain much confidence. Around three years ago the returns on capital were 28%, but since then they've fallen to 10%. However it looks like Primotec Group 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Primotec Group's ROCE

Bringing it all together, while we're somewhat encouraged by Primotec Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 2.0% over the last year, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Primotec Group (of which 1 can't be ignored!) that you should know about.

While Primotec Group 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.