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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. With that in mind, the ROCE of Porvair (LON:PRV) looks decent, right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for Porvair, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = UK£22m ÷ (UK£215m - UK£37m) (Based on the trailing twelve months to November 2024).
Thus, Porvair has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 14%.
View our latest analysis for Porvair
In the above chart we have measured Porvair's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Porvair .
What Does the ROCE Trend For Porvair Tell Us?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 46% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
In the end, Porvair has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 20% return to shareholders who held over that period. So to determine if Porvair is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
If you're still interested in Porvair it's worth checking out our FREE intrinsic value approximation for PRV to see if it's trading at an attractive price in other respects.