What Can The Trends At Park City Group (NASDAQ:PCYG) Tell Us About Their Returns?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Park City Group (NASDAQ:PCYG) and its trend of ROCE, we really liked what we saw.

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

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 Park City Group:

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

0.038 = US$1.7m ÷ (US$55m - US$9.7m) (Based on the trailing twelve months to December 2020).

So, Park City Group has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.

View our latest analysis for Park City Group

In the above chart we have measured Park City Group'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 Park City Group.

What Can We Tell From Park City Group's ROCE Trend?

Park City Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Park City Group is utilizing 56% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

To the delight of most shareholders, Park City Group has now broken into profitability. And since the stock has fallen 33% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Park City Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

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. 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.
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