Returns On Capital Are Showing Encouraging Signs At Panoramic Resources (ASX:PAN)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Panoramic Resources' (ASX:PAN) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Panoramic Resources, this is the formula:

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

0.015 = AU$3.9m ÷ (AU$301m - AU$49m) (Based on the trailing twelve months to June 2022).

Thus, Panoramic Resources has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 10.0%.

See our latest analysis for Panoramic Resources

Above you can see how the current ROCE for Panoramic Resources 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 report for Panoramic Resources.

So How Is Panoramic Resources' ROCE Trending?

The fact that Panoramic Resources 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 1.5% on its capital. Not only that, but the company is utilizing 77% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 16% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

Long story short, we're delighted to see that Panoramic Resources' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 38% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 2 warning signs for Panoramic Resources (1 shouldn't be ignored) you should be aware of.

While Panoramic Resources 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. 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.