There are some key trends we need to look out for when identifying the next multi-bagger. Ideally, a company will exhibit two trends: first, a growing return on the capital employed (ROCE) and secondly an increasing Crowd of capital employed. Essentially, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. So when we looked at pyramid (ETR:M3BK) and its ROCE trend.
Return on Capital Employed (ROCE): What is it?
For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate with the capital employed in its business. Analysts use this formula to calculate it for Pyramid:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.0028 = €157,000 ÷ (€72 million – €16 million) (Based on the last twelve months to December 2023).
So, Pyramid has a ROCE of 0.3%. In absolute terms, this is a low return and it is also below the industry average of 12% in the technology sector.
Check out our latest analysis for Pyramid
Above you can see how the current ROCE for Pyramid compares to previous returns on capital, but there is only so much that can be said from the past. If you want to know what analysts are forecasting for the future, you should check out our free analyst report for Pyramid.
What can we learn from Pyramid’s ROCE trend?
We are pleased to see Pyramid capitalizing on its investments and now profitable. Although the company is now profitable, a year ago it was making losses on invested capital. In terms of capital employed, Pyramid is using 30% less capital than it was a year ago, which on the surface may suggest that the company has become more efficient in generating those profits. This could potentially mean that the company is selling some of its assets.
For completeness, it’s worth mentioning that there was a significant increase in the company’s current liabilities during this period, so we would attribute some of the ROCE growth to this. In effect, this means that suppliers or short-term creditors are now financing 23% of the business, which is more than a year ago. It’s worth keeping an eye on this, because as the share of current liabilities to total assets increases, some risk aspects also increase.
Finally…
In short, we are pleased to see that Pyramid has been able to generate higher returns with less capital. There may be an opportunity here for smart investors, as the stock has fallen 66% over the past three years. With that in mind, it seems appropriate to examine the company’s current valuation metrics and future prospects.
And one more thing: We have found 3 warning signs with Pyramid and understanding it should be part of your investment process.
Although Pyramid doesn’t have the highest return, check out free List of companies with solid balance sheets and high returns on equity.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
