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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in PRL Global's (ASX:PRG) returns on capital, so let's have a look.
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Return On Capital Employed (ROCE): What Is It?
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 PRL Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = AU$9.0m ÷ (AU$486m - AU$191m) (Based on the trailing twelve months to December 2024).
Thus, PRL Global has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.3%.
View our latest analysis for PRL Global
Historical performance is a great place to start when researching a stock so above you can see the gauge for PRL Global's ROCE against it's prior returns. If you'd like to look at how PRL Global has performed in the past in other metrics, you can view this free graph of PRL Global's past earnings, revenue and cash flow.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 26%. So we're very much inspired by what we're seeing at PRL Global thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.