Palms Sports PJSC (ADX:PALMS) Knows How To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So, when we ran our eye over Palms Sports PJSC's (ADX:PALMS) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Palms Sports PJSC:

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

0.20 = د.إ83m ÷ (د.إ433m - د.إ26m) (Based on the trailing twelve months to June 2022).

So, Palms Sports PJSC has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 8.0%.

See our latest analysis for Palms Sports PJSC

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Palms Sports PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Palms Sports PJSC's history of ROCE, it's quite impressive. Over the past two years, ROCE has remained relatively flat at around 20% and the business has deployed 37% more capital into its operations. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In summary, we're delighted to see that Palms Sports PJSC has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, despite the favorable fundamentals, the stock has fallen 34% 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.

Palms Sports PJSC is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.