S.C. Prebet Aiud (BVB:PREB) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in S.C. Prebet Aiud's (BVB:PREB) 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 S.C. Prebet Aiud is:

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

0.091 = RON5.0m ÷ (RON68m - RON13m) (Based on the trailing twelve months to December 2022).

So, S.C. Prebet Aiud has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 9.7%.

View 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 of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that S.C. Prebet Aiud is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 9.1% on its capital. And unsurprisingly, like most companies trying to break into the black, S.C. Prebet Aiud is utilizing 78% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. The current liabilities has increased to 19% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From S.C. Prebet Aiud's ROCE

Overall, S.C. Prebet Aiud gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 708% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if S.C. Prebet Aiud can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing S.C. Prebet Aiud we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While S.C. Prebet Aiud isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.