Capital Investment Trends At Palms Sports PJSC (ADX:PALMS) Look Strong

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Palms Sports PJSC's (ADX:PALMS) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Palms Sports PJSC, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = د.إ80m ÷ (د.إ376m - د.إ18m) (Based on the trailing twelve months to December 2021).

Thus, Palms Sports PJSC has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 7.5%.

Check out our latest analysis for Palms Sports PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Palms Sports PJSC's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Palms Sports PJSC, check out these free graphs here.

The Trend Of ROCE

Palms Sports PJSC deserves to be commended in regards to it's returns. Over the past two years, ROCE has remained relatively flat at around 22% and the business has deployed 38% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Palms Sports PJSC has done well to reduce current liabilities to 4.7% of total assets over the last two years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In short, we'd argue Palms Sports PJSC has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, despite the favorable fundamentals, the stock has fallen 26% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a separate note, we've found 1 warning sign for Palms Sports PJSC you'll probably want to know about.

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.