Returns Are Gaining Momentum At Per Aarsleff Holding (CPH:PAAL B)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Per Aarsleff Holding's (CPH:PAAL B) returns on capital, so let's have 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. The formula for this calculation on Per Aarsleff Holding is:

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

0.14 = kr.739m ÷ (kr.12b - kr.6.9b) (Based on the trailing twelve months to December 2022).

So, Per Aarsleff Holding has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10.0% it's much better.

View our latest analysis for Per Aarsleff Holding

In the above chart we have measured Per Aarsleff Holding's 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 Per Aarsleff Holding here for free.

SWOT Analysis for Per Aarsleff Holding

So How Is Per Aarsleff Holding's ROCE Trending?

The trends we've noticed at Per Aarsleff Holding are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 44% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Per Aarsleff Holding has a high ratio of current liabilities to total assets of 57%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Per Aarsleff Holding's ROCE

To sum it up, Per Aarsleff Holding has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 49% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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 final note, we found 2 warning signs for Per Aarsleff Holding (1 makes us a bit uncomfortable) you should be aware of.

While Per Aarsleff Holding 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.