Prakash Pipes (NSE:PPL) Might Become A Compounding Machine

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Prakash Pipes (NSE:PPL) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Prakash Pipes:

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

0.27 = ₹734m ÷ (₹3.8b - ₹1.0b) (Based on the trailing twelve months to December 2022).

Therefore, Prakash Pipes has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Building industry average of 13%.

Check out our latest analysis for Prakash Pipes

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

What Can We Tell From Prakash Pipes' ROCE Trend?

Prakash Pipes deserves to be commended in regards to it's returns. The company has consistently earned 27% for the last three years, and the capital employed within the business has risen 125% in that time. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Prakash Pipes can keep this up, we'd be very optimistic about its future.

Our Take On Prakash Pipes' ROCE

In short, we'd argue Prakash Pipes has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 346% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 3 warning signs facing Prakash Pipes that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.