Returns On Capital Are Showing Encouraging Signs At S.C. Prodlacta (BVB:PRAE)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in S.C. Prodlacta's (BVB:PRAE) returns on capital, so let's have a look.

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

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 S.C. Prodlacta is:

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

0.084 = RON4.2m ÷ (RON88m - RON38m) (Based on the trailing twelve months to December 2024).

Therefore, S.C. Prodlacta has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 2.6% generated by the Food industry, it's much better.

View our latest analysis for S.C. Prodlacta

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 S.C. Prodlacta has performed in the past in other metrics, you can view this free graph of S.C. Prodlacta's 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 8.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 40% more capital is being employed now too. So we're very much inspired by what we're seeing at S.C. Prodlacta thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that S.C. Prodlacta has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

All in all, it's terrific to see that S.C. Prodlacta is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 46% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

S.C. Prodlacta does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.