Will The ROCE Trend At Priortech (TLV:PRTC) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Priortech (TLV:PRTC) so let's look a bit deeper.

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

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 Priortech is:

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

0.013 = US$2.3m ÷ (US$181m - US$11m) (Based on the trailing twelve months to September 2020).

Thus, Priortech has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 12%.

Check out our latest analysis for Priortech

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 Priortech, check out these free graphs here.

What Can We Tell From Priortech's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 1,729% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a related note, the company's ratio of current liabilities to total assets has decreased to 6.3%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To bring it all together, Priortech has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 528% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Priortech can keep these trends up, it could have a bright future ahead.

Priortech does have some risks though, and we've spotted 2 warning signs for Priortech that you might be interested in.

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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