Pricol (NSE:PRICOLLTD) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Pricol (NSE:PRICOLLTD), it didn't seem to tick all of these boxes.

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 Pricol, this is the formula:

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

0.18 = ₹1.5b ÷ (₹12b - ₹4.1b) (Based on the trailing twelve months to June 2021).

Thus, Pricol has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Auto Components industry.

See our latest analysis for Pricol

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

What Can We Tell From Pricol's ROCE Trend?

On the surface, the trend of ROCE at Pricol doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 18%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Pricol's ROCE

While returns have fallen for Pricol in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 135% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Pricol does have some risks though, and we've spotted 4 warning signs for Pricol that you might be interested in.

While Pricol 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.

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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