Pagaya Technologies (NASDAQ:PGY) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Pagaya Technologies (NASDAQ:PGY), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Pagaya Technologies is:

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

0.02 = US$24m ÷ (US$1.5b - US$241m) (Based on the trailing twelve months to June 2024).

Therefore, Pagaya Technologies has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Software industry average of 8.6%.

Check out our latest analysis for Pagaya Technologies

In the above chart we have measured Pagaya Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Pagaya Technologies for free.

What Can We Tell From Pagaya Technologies' ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 6.7% four years ago, while the business's capital employed increased by 846%. Usually this isn't ideal, but given Pagaya Technologies conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Pagaya Technologies' earnings and if they change as a result from the capital raise.

On a side note, Pagaya Technologies' current liabilities have increased over the last four years to 17% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Pagaya Technologies. Despite these promising trends, the stock has collapsed 91% over the last three years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you'd like to know about the risks facing Pagaya Technologies, we've discovered 3 warning signs that you should be aware of.

While Pagaya Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.