Should We Be Excited About The Trends Of Returns At PRGX Global (NASDAQ:PRGX)?
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating PRGX Global (NASDAQ:PRGX), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for PRGX Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$4.1m ÷ (US$122m - US$26m) (Based on the trailing twelve months to June 2020).
Therefore, PRGX Global has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.
Check out our latest analysis for PRGX Global
Above you can see how the current ROCE for PRGX Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering PRGX Global here for free.
The Trend Of ROCE
When we looked at the ROCE trend at PRGX Global, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like PRGX Global might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by PRGX Global's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you're still interested in PRGX Global it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While PRGX Global isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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