We Like These Underlying Return On Capital Trends At Prosafe (OB:PRS)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Prosafe (OB:PRS) so let's look a bit deeper.

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. The formula for this calculation on Prosafe is:

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

0.071 = US$32m ÷ (US$500m - US$42m) (Based on the trailing twelve months to December 2022).

Thus, Prosafe has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.

Check out our latest analysis for Prosafe

Above you can see how the current ROCE for Prosafe compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Prosafe here for free.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Prosafe is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 7.1% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 76% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In a nutshell, we're pleased to see that Prosafe has been able to generate higher returns from less capital. However the stock is down a substantial 99% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we found 3 warning signs for Prosafe (1 is significant) 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.