Returns on Capital Paint A Bright Future For Pilbara Minerals (ASX:PLS)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Pilbara Minerals (ASX:PLS) looks great, so lets see what the trend can tell us.

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 Pilbara Minerals, this is the formula:

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

0.47 = AU$1.8b ÷ (AU$4.4b - AU$552m) (Based on the trailing twelve months to December 2023).

Thus, Pilbara Minerals has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 11%.

View 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, you can check out the forecasts from the analysts covering Pilbara Minerals for free.

What The Trend Of ROCE Can Tell Us

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 47% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Pilbara Minerals is utilizing 705% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Long story short, we're delighted to see that Pilbara Minerals' reinvestment activities have paid off and the company is now profitable. And a remarkable 533% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Pilbara Minerals can keep these trends up, it could have a bright future ahead.

Like most companies, Pilbara Minerals does come with some risks, and we've found 2 warning signs that you should be aware of.

Pilbara Minerals 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.