Returns On Capital Signal Tricky Times Ahead For Pagaya Technologies (NASDAQ:PGY)

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. 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.

Understanding 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. Analysts use this formula to calculate it for Pagaya Technologies:

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

0.0064 = US$8.4m ÷ (US$1.5b - US$169m) (Based on the trailing twelve months to March 2024).

Therefore, Pagaya Technologies has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.2%.

See 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're interested, you can view the analysts predictions in our free analyst report for Pagaya Technologies .

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 2.5% four years ago, while the business's capital employed increased by 1,320%. That being said, Pagaya Technologies raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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.

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 89% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Pagaya Technologies does have some risks though, and we've spotted 2 warning signs for Pagaya Technologies that you might be interested in.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com