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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Pan African Resources' (LON:PAF) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Pan African Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = US$113m ÷ (US$483m - US$106m) (Based on the trailing twelve months to June 2021).
Thus, Pan African Resources has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.
Check out our latest analysis for Pan African Resources
In the above chart we have measured Pan African Resources' 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 Pan African Resources here for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Pan African Resources. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at Pan African Resources thanks to its ability to profitably reinvest capital.
The Bottom Line On Pan African Resources' ROCE
All in all, it's terrific to see that Pan African Resources is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.
One more thing, we've spotted 1 warning sign facing Pan African Resources that you might find interesting.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.