Prism Johnson (NSE:PRSMJOHNSN) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Prism Johnson's (NSE:PRSMJOHNSN) returns on capital, so let's have a look.

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. To calculate this metric for Prism Johnson, this is the formula:

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

0.11 = ₹4.3b ÷ (₹62b - ₹24b) (Based on the trailing twelve months to June 2021).

So, Prism Johnson has an ROCE of 11%. In isolation, that's a pretty standard return but against the Basic Materials industry average of 14%, it's not as good.

View our latest analysis for Prism Johnson

Above you can see how the current ROCE for Prism Johnson compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

The trends we've noticed at Prism Johnson are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 24%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Prism Johnson has. Since the stock has only returned 21% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 1 warning sign for Prism Johnson that we think you should be aware of.

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.

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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.
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