In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Paylocity Holding (NASDAQ:PCTY) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Paylocity Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$279m ÷ (US$4.0b - US$2.5b) (Based on the trailing twelve months to September 2024).
So, Paylocity Holding has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 15% generated by the Professional Services industry.
See our latest analysis for Paylocity Holding
Above you can see how the current ROCE for Paylocity Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Paylocity Holding .
How Are Returns Trending?
We like the trends that we're seeing from Paylocity Holding. The data shows that returns on capital have increased substantially over the last five years to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 293% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 62%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Paylocity Holding has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
What We Can Learn From Paylocity Holding's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Paylocity Holding has. Since the stock has returned a solid 67% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Paylocity Holding can keep these trends up, it could have a bright future ahead.