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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of PDD Holdings (NASDAQ:PDD) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for PDD Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = CN¥105b ÷ (CN¥467b - CN¥180b) (Based on the trailing twelve months to September 2024).
Therefore, PDD Holdings has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 12%.
See our latest analysis for PDD Holdings
In the above chart we have measured PDD Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PDD Holdings for free.
So How Is PDD Holdings' ROCE Trending?
The fact that PDD Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 37% on its capital. In addition to that, PDD Holdings is employing 815% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 39%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that PDD Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
Overall, PDD Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if PDD Holdings can keep these trends up, it could have a bright future ahead.