Prefab (BVB:PREH) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Prefab (BVB:PREH) so let's look a bit deeper.

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 Prefab is:

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

0.10 = RON23m ÷ (RON268m - RON40m) (Based on the trailing twelve months to June 2021).

Therefore, Prefab has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.8%.

See 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're interested in investigating Prefab's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Prefab's ROCE Trend?

Prefab is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 769% over the last five years. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To bring it all together, Prefab has done well to increase the returns it's generating from its capital employed. And a remarkable 110% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Prefab does have some risks though, and we've spotted 4 warning signs for Prefab that you might be interested in.

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.