Here’s What’s Happening With Returns At Prime Focus (NSE:PFOCUS)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Prime Focus' (NSE:PFOCUS) 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. The formula for this calculation on Prime Focus is:

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

0.045 = ₹1.1b ÷ (₹50b - ₹25b) (Based on the trailing twelve months to June 2020).

So, Prime Focus has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 6.1%.

View our latest analysis for Prime Focus

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Prime Focus has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.5%. The amount of capital employed has increased too, by 25%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 50% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Prime Focus' ROCE

To sum it up, Prime Focus has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 1 warning sign for Prime Focus you'll probably want to know about.

While Prime Focus 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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