Investors Should Be Encouraged By Pan African Resources' (LON:PAF) Returns On Capital

By
Simply Wall St
Published
May 31, 2021
AIM:PAF
Source: Shutterstock

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. And in light of that, the trends we're seeing at Pan African Resources' (LON:PAF) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.26 = US$93m ÷ (US$435m - US$71m) (Based on the trailing twelve months to December 2020).

Therefore, Pan African Resources has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 14%.

Check out our latest analysis for Pan African Resources

roce
AIM:PAF Return on Capital Employed June 1st 2021

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 to see what analysts are forecasting going forward, you should check out our free report for Pan African Resources.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Pan African Resources are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% 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.

In Conclusion...

To sum it up, Pan African Resources has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last five years. In light of that, we think it's worth looking further into this stock because if Pan African Resources can keep these trends up, it could have a bright future ahead.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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