Panama Petrochem (NSE:PANAMAPET) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Panama Petrochem (NSE:PANAMAPET) we really liked what we saw.

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. The formula for this calculation on Panama Petrochem is:

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

0.37 = ₹3.3b ÷ (₹13b - ₹4.0b) (Based on the trailing twelve months to December 2022).

Thus, Panama Petrochem has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

View 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 want to delve into the historical earnings, revenue and cash flow of Panama Petrochem, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Panama Petrochem. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 37%. The amount of capital employed has increased too, by 152%. So we're very much inspired by what we're seeing at Panama Petrochem thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Panama Petrochem has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

All in all, it's terrific to see that Panama Petrochem is reaping the rewards from prior investments and is growing its capital base. And with a respectable 85% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

On a separate note, we've found 1 warning sign for Panama Petrochem you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.