There's Been No Shortage Of Growth Recently For PayPal Holdings' (NASDAQ:PYPL) Returns On Capital

By
Simply Wall St
Published
December 27, 2021
NasdaqGS:PYPL
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at PayPal Holdings (NASDAQ:PYPL) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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 PayPal Holdings, this is the formula:

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

0.13 = US$4.3b ÷ (US$75b - US$42b) (Based on the trailing twelve months to September 2021).

Thus, PayPal Holdings has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the IT industry.

View our latest analysis for PayPal Holdings

roce
NasdaqGS:PYPL Return on Capital Employed December 27th 2021

In the above chart we have measured PayPal Holdings' 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 PayPal Holdings here for free.

How Are Returns Trending?

The trends we've noticed at PayPal Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 109% more capital is being employed now too. So we're very much inspired by what we're seeing at PayPal Holdings thanks to its ability to profitably reinvest capital.

On a side note, PayPal Holdings' current liabilities are still rather high at 56% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, it's great to see that PayPal Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 386% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if PayPal Holdings can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing PayPal Holdings that you might find interesting.

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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