Pilbara Minerals (ASX:PLS) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Pilbara Minerals (ASX:PLS) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Pilbara Minerals is:

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

0.13 = AU$139m ÷ (AU$1.2b - AU$154m) (Based on the trailing twelve months to December 2021).

Therefore, Pilbara Minerals has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Metals and Mining industry.

Check out our latest analysis for Pilbara Minerals

In the above chart we have measured Pilbara Minerals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pilbara Minerals.

The Trend Of ROCE

We're delighted to see that Pilbara Minerals is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 13% which is a sight for sore eyes. Not only that, but the company is utilizing 635% 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.

Our Take On Pilbara Minerals' ROCE

In summary, it's great to see that Pilbara Minerals has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 3 warning signs for Pilbara Minerals you'll probably want to know about.

While Pilbara Minerals 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.