Parpro (TWSE:4916) Has More To Do To Multiply In Value Going Forward

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Parpro (TWSE:4916) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Parpro:

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

0.014 = NT$34m ÷ (NT$3.5b - NT$1.0b) (Based on the trailing twelve months to September 2024).

Therefore, Parpro has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.7%.

Check out our latest analysis for Parpro

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

What Can We Tell From Parpro's ROCE Trend?

Over the past five years, Parpro's ROCE has remained relatively flat while the business is using 45% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 1.4%, it's hard to get excited about these developments.

On a side note, Parpro has done well to reduce current liabilities to 29% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

It's a shame to see that Parpro is effectively shrinking in terms of its capital base. Yet to long term shareholders the stock has gifted them an incredible 120% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 2 warning signs with Parpro and understanding these should be part of your investment process.

While Parpro 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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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.