Why You Should Care About Pandora's (CPH:PNDORA) Strong Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Pandora (CPH:PNDORA) looks attractive right now, so lets see what the trend of returns can tell us.

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Understanding Return On Capital Employed (ROCE)

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 Pandora:

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

0.45 = kr.8.0b ÷ (kr.28b - kr.9.9b) (Based on the trailing twelve months to December 2024).

Thus, Pandora has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Luxury industry average of 9.7%.

Check out our latest analysis for Pandora

Above you can see how the current ROCE for Pandora 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 Pandora .

What The Trend Of ROCE Can Tell Us

In terms of Pandora's history of ROCE, it's quite impressive. The company has consistently earned 45% for the last five years, and the capital employed within the business has risen 30% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Pandora can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In short, we'd argue Pandora has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 371% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Pandora does have some risks though, and we've spotted 3 warning signs for Pandora that you might be interested in.

Pandora 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.