Pamapol (WSE:PMP) Is Very Good At Capital Allocation

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Pamapol (WSE:PMP) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Pamapol:

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

0.22 = zł53m ÷ (zł533m - zł289m) (Based on the trailing twelve months to June 2022).

Therefore, Pamapol has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Food industry average of 20% it's pretty much on par.

Check out the opportunities and risks within the PL Food industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pamapol's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pamapol, check out these free graphs here.

What Does the ROCE Trend For Pamapol Tell Us?

Pamapol is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 22%. 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 85%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Pamapol has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Pamapol's ROCE

In summary, it's great to see that Pamapol 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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Pamapol, we've spotted 2 warning signs, and 1 of them can't be ignored.

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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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.