What Do The Returns On Capital At Procurri (SGX:BVQ) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Procurri (SGX:BVQ) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Procurri, this is the formula:

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

0.0012 = S$81k ÷ (S$130m - S$64m) (Based on the trailing twelve months to December 2020).

So, Procurri has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.

See our latest analysis for Procurri

Historical performance is a great place to start when researching a stock so above you can see the gauge for Procurri's ROCE against it's prior returns. If you'd like to look at how Procurri has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Procurri's ROCE Trending?

On the surface, the trend of ROCE at Procurri doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.1% from 23% five years ago. However it looks like Procurri might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Procurri has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. 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.

The Bottom Line On Procurri's ROCE

Bringing it all together, while we're somewhat encouraged by Procurri's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 52% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Procurri we've found 5 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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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