Returns Are Gaining Momentum At Prime Focus (NSE:PFOCUS)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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, Prime Focus (NSE:PFOCUS) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Prime Focus, this is the formula:

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

0.10 = ₹5.3b ÷ (₹68b - ₹17b) (Based on the trailing twelve months to March 2023).

Therefore, Prime Focus has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 4.0% it's much better.

Check out our latest analysis for Prime Focus

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

What Does the ROCE Trend For Prime Focus Tell Us?

Prime Focus is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The amount of capital employed has increased too, by 160%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Prime Focus has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

All in all, it's terrific to see that Prime Focus is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. So with that in mind, we think the stock deserves further research.

Prime Focus does have some risks though, and we've spotted 2 warning signs for Prime Focus that you might be interested in.

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.