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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Palo Alto Networks (NASDAQ:PANW) so let's look a bit deeper.
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 Palo Alto Networks:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$1.1b ÷ (US$21b - US$7.6b) (Based on the trailing twelve months to January 2025).
So, Palo Alto Networks has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Software industry average of 9.2%.
View our latest analysis for Palo Alto Networks
Above you can see how the current ROCE for Palo Alto Networks 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 Palo Alto Networks for free.
What Does the ROCE Trend For Palo Alto Networks Tell Us?
Palo Alto Networks has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.4% which is a sight for sore eyes. In addition to that, Palo Alto Networks is employing 171% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In Conclusion...
In summary, it's great to see that Palo Alto Networks has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 566% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 1 warning sign for Palo Alto Networks that we think you should be aware of.