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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Pyramid (ETR:M3BK) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Pyramid:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0028 = €157k ÷ (€72m - €16m) (Based on the trailing twelve months to December 2023).
So, Pyramid has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 12%.
View our latest analysis for Pyramid
Above you can see how the current ROCE for Pyramid compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Pyramid .
What Can We Tell From Pyramid's ROCE Trend?
We're delighted to see that Pyramid is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital one year ago. In regards to capital employed, Pyramid is using 30% less capital than it was one year ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was one year ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
In a nutshell, we're pleased to see that Pyramid has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 66% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.