What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don’t think PFSweb (NASDAQ:PFSW) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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 PFSweb:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.018 = US$2.2m ÷ (US$191m – US$69m) (Based on the trailing twelve months to June 2020).
Thus, PFSweb has an ROCE of 1.8%. Ultimately, that’s a low return and it under-performs the IT industry average of 10.0%.
In the above chart we have a measured PFSweb’s 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 PFSweb here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at PFSweb, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 3.5% five years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.On a side note, PFSweb has done well to pay down its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
Bringing it all together, while we’re somewhat encouraged by PFSweb’s reinvestment in its own business, we’re aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last five years. On the whole, we aren’t too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you’d like to know about the risks facing PFSweb, we’ve discovered 1 warning sign that you should be aware of.
While PFSweb may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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