The Returns On Capital At Planet Image International (NASDAQ:YIBO) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Planet Image International (NASDAQ:YIBO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Planet Image International:

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

0.16 = US$8.7m ÷ (US$139m - US$85m) (Based on the trailing twelve months to June 2024).

Thus, Planet Image International has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Commercial Services industry.

View our latest analysis for Planet Image International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Planet Image International's ROCE against it's prior returns. If you're interested in investigating Planet Image International's past further, check out this free graph covering Planet Image International's past earnings, revenue and cash flow.

What Can We Tell From Planet Image International's ROCE Trend?

On the surface, the trend of ROCE at Planet Image International doesn't inspire confidence. Over the last four years, returns on capital have decreased to 16% from 25% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Planet Image International has decreased its current liabilities to 61% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

To conclude, we've found that Planet Image International is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Planet Image International does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.