Why We Like The Returns At Pilbara Minerals (ASX:PLS)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Pilbara Minerals' (ASX:PLS) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.47 = 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%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Pilbara Minerals .

What Can We Tell From Pilbara Minerals' ROCE Trend?

Pilbara Minerals has recently broken into profitability so their prior investments seem to be paying off. 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 indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From 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.

On a final note, we've found 2 warning signs for Pilbara Minerals that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com