Stock Analysis

Returns On Capital - An Important Metric For Prefab (BVB:PREH)

BVB:PREH
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Prefab (BVB:PREH) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.08 = RON18m ÷ (RON268m - RON37m) (Based on the trailing twelve months to September 2020).

Thus, Prefab has an ROCE of 8.0%. Even though it's in line with the industry average of 8.0%, it's still a low return by itself.

See our latest analysis for Prefab

roce
BVB:PREH Return on Capital Employed December 4th 2020

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 The Trend Of ROCE Can Tell Us

Prefab has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 388% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Prefab's ROCE

To sum it up, Prefab is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 55% return over the last five years. 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'd like to know more about Prefab, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Prefab 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. 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.
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