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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Pilbara Minerals (ASX:PLS) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Pilbara Minerals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = AU$396m ÷ (AU$4.3b - AU$430m) (Based on the trailing twelve months to June 2024).
Thus, Pilbara Minerals has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10.0%.
View our latest analysis for Pilbara Minerals
Above you can see how the current ROCE for Pilbara Minerals 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 Pilbara Minerals .
What Can We Tell From Pilbara Minerals' ROCE Trend?
The fact that Pilbara Minerals is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 10% which is a sight for sore eyes. In addition to that, Pilbara Minerals is employing 641% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From Pilbara Minerals' ROCE
Overall, Pilbara Minerals gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 717% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know more about Pilbara Minerals, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.