We Like These Underlying Return On Capital Trends At Pioneer Embroideries (NSE:PIONEEREMB)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Pioneer Embroideries (NSE:PIONEEREMB) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Pioneer Embroideries is:

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

0.17 = ₹214m ÷ (₹1.9b - ₹637m) (Based on the trailing twelve months to December 2021).

So, Pioneer Embroideries has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 14%.

Check out our latest analysis for Pioneer Embroideries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pioneer Embroideries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pioneer Embroideries, check out these free graphs here.

What Can We Tell From Pioneer Embroideries' ROCE Trend?

Pioneer Embroideries is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 155% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

In summary, we're delighted to see that Pioneer Embroideries has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 3 warning signs with Pioneer Embroideries and understanding these should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.