The Return Trends At Pilbara Minerals (ASX:PLS) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Pilbara Minerals (ASX:PLS) so let's look a bit deeper.

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

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 Pilbara Minerals:

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

0.10 = AU$396m ÷ (AU$4.3b - AU$430m) (Based on the trailing twelve months to June 2024).

Thus, Pilbara Minerals has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10.0%.

View our latest analysis for Pilbara Minerals

Above you can see how the current ROCE for Pilbara Minerals compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Pilbara Minerals .

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. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 10% on its capital. Not only that, but the company is utilizing 641% 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.

The Bottom Line 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. 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.

If you'd like to know more about Pilbara Minerals, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Pilbara Minerals isn't earning the highest return, check out this free list of companies that are 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.