Returns On Capital At S.C. Prebet Aiud (BVB:PREB) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at S.C. Prebet Aiud (BVB:PREB) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for S.C. Prebet Aiud:

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

0.077 = RON5.1m ÷ (RON100m - RON34m) (Based on the trailing twelve months to March 2024).

So, S.C. Prebet Aiud has an ROCE of 7.7%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

See our latest analysis for S.C. Prebet Aiud

Historical performance is a great place to start when researching a stock so above you can see the gauge for S.C. Prebet Aiud's ROCE against it's prior returns. If you're interested in investigating S.C. Prebet Aiud's past further, check out this free graph covering S.C. Prebet Aiud's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of S.C. Prebet Aiud's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.7% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On S.C. Prebet Aiud's ROCE

While returns have fallen for S.C. Prebet Aiud in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 1,266% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

S.C. Prebet Aiud does have some risks, we noticed 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While S.C. Prebet Aiud 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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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.