PPT Armature a.d (BELEX:PPTA) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at PPT Armature a.d (BELEX:PPTA) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for PPT Armature a.d:

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

0.029 = дин37m ÷ (дин1.4b - дин141m) (Based on the trailing twelve months to December 2023).

Therefore, PPT Armature a.d has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

See our latest analysis for PPT Armature a.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for PPT Armature a.d's ROCE against it's prior returns. If you're interested in investigating PPT Armature a.d's past further, check out this free graph covering PPT Armature a.d's past earnings, revenue and cash flow.

What Can We Tell From PPT Armature a.d's ROCE Trend?

On the surface, the trend of ROCE at PPT Armature a.d doesn't inspire confidence. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 2.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, PPT Armature a.d has done well to pay down its current liabilities to 9.8% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by PPT Armature a.d's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for PPT Armature a.d (of which 3 are a bit unpleasant!) that you should know about.

While PPT Armature a.d 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. 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.