Investors Met With Slowing Returns on Capital At Pan African Resources (LON:PAF)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Pan African Resources' (LON:PAF) trend of ROCE, we liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Pan African Resources is:

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

0.14 = US$107m ÷ (US$849m - US$87m) (Based on the trailing twelve months to December 2024).

So, Pan African Resources has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 13%.

View our latest analysis for Pan African Resources

In the above chart we have measured Pan African Resources' 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 Pan African Resources for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 123% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

The main thing to remember is that Pan African Resources has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 279% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with Pan African Resources (including 1 which shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.