What Can The Trends At Pioneer Embroideries (NSE:PIONEEREMB) Tell Us About Their Returns?

What are the early trends we should look for to identify a stock that could 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.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Pioneer Embroideries is:

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

0.078 = ₹83m ÷ (₹1.7b - ₹620m) (Based on the trailing twelve months to September 2020).

Thus, Pioneer Embroideries has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.7%.

See 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'd like to look at how Pioneer Embroideries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Pioneer Embroideries. The data shows that returns on capital have increased by 168% over the trailing five years. The company is now earning ₹0.08 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. Pioneer Embroideries may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In a nutshell, we're pleased to see that Pioneer Embroideries has been able to generate higher returns from less capital. Given the stock has declined 54% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

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

While Pioneer Embroideries 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.

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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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