If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Perma-Pipe International Holdings' (NASDAQ:PPIH) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Perma-Pipe International Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$8.1m ÷ (US$123m - US$38m) (Based on the trailing twelve months to January 2022).
Therefore, Perma-Pipe International Holdings has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.
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'd like to look at how Perma-Pipe International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Perma-Pipe International Holdings' ROCE Trending?
We're delighted to see that Perma-Pipe International Holdings is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 9.5% on its capital. While returns have increased, the amount of capital employed by Perma-Pipe International Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From Perma-Pipe International Holdings' ROCE
To bring it all together, Perma-Pipe International Holdings has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 32% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
If you want to know some of the risks facing Perma-Pipe International Holdings we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.
While Perma-Pipe International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.