We Think Panama Petrochem (NSE:PANAMAPET) Might Have The DNA Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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. The formula for this calculation on Panama Petrochem is:

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

0.44 = ₹3.0b ÷ (₹11b - ₹4.1b) (Based on the trailing twelve months to December 2021).

So, Panama Petrochem has an ROCE of 44%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

Check out our latest analysis for Panama Petrochem

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Panama Petrochem, check out these free graphs here.

What Can We Tell From Panama Petrochem's ROCE Trend?

The trends we've noticed at Panama Petrochem are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 44%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 130%. 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 38%, 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.

What We Can Learn From Panama Petrochem's ROCE

In summary, it's great to see that Panama Petrochem can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 192% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Panama Petrochem does come with some risks, and we've found 2 warning signs that you should be aware of.

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.