Is There More Growth In Store For Pricol's (NSE:PRICOLLTD) Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Pricol (NSE:PRICOLLTD) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pricol, this is the formula:

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

0.037 = ₹270m ÷ (₹12b - ₹5.1b) (Based on the trailing twelve months to September 2020).

Thus, Pricol has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.6%.

See our latest analysis for Pricol

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're interested in investigating Pricol's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Pricol Tell Us?

Pricol has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.7% which is a sight for sore eyes. In addition to that, Pricol is employing 1,263% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, Pricol has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Pricol's ROCE

Long story short, we're delighted to see that Pricol's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 50% over the last three years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with Pricol (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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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This article by Simply Wall St is general in nature. 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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