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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of People Infrastructure (ASX:PPE) we really liked what we saw.
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. Analysts use this formula to calculate it for People Infrastructure:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = AU$28m ÷ (AU$165m - AU$33m) (Based on the trailing twelve months to December 2020).
So, People Infrastructure has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
Check out our latest analysis for People Infrastructure
In the above chart we have measured People Infrastructure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for People Infrastructure.
What Does the ROCE Trend For People Infrastructure Tell Us?
We like the trends that we're seeing from People Infrastructure. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 259%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
One more thing to note, People Infrastructure has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line
To sum it up, People Infrastructure has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 186% to shareholders over the last three 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.