Returns On Capital Signal Difficult Times Ahead For Prefab (BVB:PREH)

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Prefab (BVB:PREH) we aren't filled with optimism, but let's investigate further.

What Is 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. The formula for this calculation on Prefab is:

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

0.012 = RON2.8m ÷ (RON263m - RON37m) (Based on the trailing twelve months to June 2024).

So, Prefab has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.0%.

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 covering Prefab's past earnings, revenue and cash flow.

So How Is Prefab's ROCE Trending?

There is reason to be cautious about Prefab, given the returns are trending downwards. About five years ago, returns on capital were 2.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Prefab to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Prefab is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 355% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 4 warning signs we've spotted with Prefab (including 2 which can't be ignored) .

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.