Panama Petrochem (NSE:PANAMAPET) Is Achieving High Returns On Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 looked at the ROCE trend of Panama Petrochem (NSE:PANAMAPET) we really liked what we saw.

What is 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 Panama Petrochem:

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

0.26 = ₹1.2b ÷ (₹7.6b - ₹3.0b) (Based on the trailing twelve months to December 2020).

Therefore, Panama Petrochem has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

Check out our latest analysis for Panama Petrochem

Historical performance is a great place to start when researching a stock so above you can see the gauge for Panama Petrochem's ROCE against it's prior returns. If you'd like to look at how Panama Petrochem has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Panama Petrochem. 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, 71% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

To sum it up, Panama Petrochem has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 523% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Panama Petrochem can keep these trends up, it could have a bright future ahead.

Panama Petrochem does have some risks though, and we've spotted 2 warning signs for Panama Petrochem that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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