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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Pearl River Holdings (CVE:PRH) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Pearl River Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥23m ÷ (CN¥201m - CN¥57m) (Based on the trailing twelve months to September 2021).
Thus, Pearl River Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Chemicals industry.
See our latest analysis for Pearl River Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Pearl River Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Pearl River Holdings Tell Us?
The trends we've noticed at Pearl River Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Pearl River Holdings' ROCE
All in all, it's terrific to see that Pearl River Holdings is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 25% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Pearl River Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.