If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at PQ Group Holdings (NYSE:PQG), it didn't seem to tick all of these boxes.
What is 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 PQ Group Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = US$158m ÷ (US$4.3b - US$234m) (Based on the trailing twelve months to September 2020).
So, PQ Group Holdings has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.1%.
Above you can see how the current ROCE for PQ Group Holdings 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 PQ Group Holdings.
The Trend Of ROCE
The returns on capital haven't changed much for PQ Group Holdings in recent years. Over the past four years, ROCE has remained relatively flat at around 3.9% and the business has deployed 26% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In summary, PQ Group Holdings has simply been reinvesting capital and generating the same low rate of return as before. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. 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.
One final note, you should learn about the 4 warning signs we've spotted with PQ Group Holdings (including 1 which doesn't sit too well with us) .
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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