Will the Promising Trends At ProfilGruppen (STO:PROF B) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 ProfilGruppen (STO:PROF B) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.08 = kr54m ÷ (kr1.2b - kr485m) (Based on the trailing twelve months to September 2020).

Thus, ProfilGruppen has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.

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

What Does the ROCE Trend For ProfilGruppen Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 102% more capital is being employed now too. So we're very much inspired by what we're seeing at ProfilGruppen thanks to its ability to profitably reinvest capital.

Another thing to note, ProfilGruppen has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On ProfilGruppen's ROCE

To sum it up, ProfilGruppen has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing ProfilGruppen, we've discovered 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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