Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Pandox (STO:PNDX B), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Pandox, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = kr1.2b ÷ (kr67b - kr5.8b) (Based on the trailing twelve months to March 2021).
Thus, Pandox has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 19%.
View our latest analysis for Pandox
Above you can see how the current ROCE for Pandox compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pandox.
So How Is Pandox's ROCE Trending?
In terms of Pandox's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.9% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On Pandox's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Pandox have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 19% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to continue researching Pandox, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Pandox may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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About OM:PNDX B
Pandox
A hotel property company, owns, develops, and leases hotel properties worldwide.
Reasonable growth potential and fair value.
