Shareholders Are Optimistic That ProfilGruppen (STO:PROF B) Will Multiply In Value

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at ProfilGruppen (STO:PROF B), we liked what we saw.

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. Analysts use this formula to calculate it for ProfilGruppen:

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

0.30 = kr225m ÷ (kr1.7b - kr985m) (Based on the trailing twelve months to June 2022).

So, ProfilGruppen has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

See our latest analysis for ProfilGruppen

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

The Trend Of ROCE

It's hard not to be impressed by ProfilGruppen's returns on capital. Over the past five years, ROCE has remained relatively flat at around 30% and the business has deployed 100% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If ProfilGruppen can keep this up, we'd be very optimistic about its future.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 57% of total assets, this reported ROCE would probably be less than30% because total capital employed would be higher.The 30% ROCE could be even lower if current liabilities weren't 57% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

Our Take On ProfilGruppen's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And given the stock has only risen 30% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if ProfilGruppen is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we found 5 warning signs for ProfilGruppen (2 shouldn't be ignored) you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.