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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Pulsar Group's (LON:PULS) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Pulsar Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00056 = UK£30k ÷ (UK£90m - UK£36m) (Based on the trailing twelve months to May 2024).
So, Pulsar Group has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Software industry average of 11%.
View our latest analysis for Pulsar Group
Above you can see how the current ROCE for Pulsar Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pulsar Group for free.
So How Is Pulsar Group's ROCE Trending?
The fact that Pulsar Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.06% on its capital. In addition to that, Pulsar Group is employing 392% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a separate but related note, it's important to know that Pulsar Group has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Pulsar Group's ROCE
In summary, it's great to see that Pulsar Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 32% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.