Precot (NSE:PRECOT) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Precot's (NSE:PRECOT) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Precot:

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

0.06 = ₹378m ÷ (₹9.8b - ₹3.5b) (Based on the trailing twelve months to December 2022).

Therefore, Precot has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

Check out our latest analysis for Precot

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

So How Is Precot's ROCE Trending?

The fact that Precot is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.0% which is a sight for sore eyes. In addition to that, Precot is employing 21% 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.

The Bottom Line On Precot's ROCE

Long story short, we're delighted to see that Precot's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 215% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Precot we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.