Investors Will Want Prefab's (BVB:PREH) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Prefab (BVB:PREH) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Prefab, this is the formula:

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

0.064 = RON15m ÷ (RON271m - RON41m) (Based on the trailing twelve months to December 2021).

Thus, Prefab has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.3%.

View our latest analysis for Prefab

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

What Does the ROCE Trend For Prefab Tell Us?

Prefab has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 404% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Prefab's ROCE

As discussed above, Prefab appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 101% 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 Prefab can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Prefab we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Prefab 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.