There's Been No Shortage Of Growth Recently For Paltalk's (NASDAQ:PALT) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Paltalk (NASDAQ:PALT) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Paltalk, this is the formula:

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

0.13 = US$1.8m ÷ (US$18m - US$3.5m) (Based on the trailing twelve months to September 2021).

Thus, Paltalk has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Interactive Media and Services industry.

View our latest analysis for Paltalk

In the above chart we have measured Paltalk's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Paltalk.

What Does the ROCE Trend For Paltalk Tell Us?

We're delighted to see that Paltalk is reaping rewards from its investments and has now broken into profitability. The company now earns 13% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line

To bring it all together, Paltalk has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 39% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 4 warning signs with Paltalk (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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.

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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.