Will The ROCE Trend At Precise Biometrics (STO:PREC) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Precise Biometrics (STO:PREC) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Precise Biometrics:

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

0.073 = kr9.4m ÷ (kr160m - kr31m) (Based on the trailing twelve months to September 2020).

Thus, Precise Biometrics has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 16%.

Check out our latest analysis for Precise Biometrics

In the above chart we have measured Precise Biometrics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Precise Biometrics here for free.

How Are Returns Trending?

Precise Biometrics has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Precise Biometrics is utilizing 66% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Precise Biometrics' ROCE

Long story short, we're delighted to see that Precise Biometrics' reinvestment activities have paid off and the company is now profitable. However the stock is down a substantial 77% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to continue researching Precise Biometrics, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Precise Biometrics 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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