We Like These Underlying Trends At Precot (NSE:PRECOT)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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, Precot (NSE:PRECOT) looks quite promising in regards to its trends of return on capital.

Understanding 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 Precot:

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

0.043 = ₹189m ÷ (₹6.8b - ₹2.5b) (Based on the trailing twelve months to September 2020).

So, Precot has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.5%.

See 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're interested in investigating Precot's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Precot is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 4.3% which is a sight for sore eyes. Not only that, but the company is utilizing 56% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Precot has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Precot does come with some risks, and we've found 2 warning signs that you should be aware of.

While Precot isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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