Returns On Capital Are Showing Encouraging Signs At Parsons (NYSE:PSN)

If you're looking for a multi-bagger, there's a few things to 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. 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 Parsons (NYSE:PSN) and its trend of ROCE, we really liked what we saw.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Parsons:

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

0.13 = US$458m ÷ (US$5.5b - US$1.9b) (Based on the trailing twelve months to December 2024).

Thus, Parsons has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 16% generated by the Professional Services industry.

Check out our latest analysis for Parsons

In the above chart we have measured Parsons' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Parsons .

The Trend Of ROCE

We like the trends that we're seeing from Parsons. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Parsons' ROCE

To sum it up, Parsons has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 66% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for PSN on our platform that is definitely worth checking out.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.