Slowing Rates Of Return At PC Connection (NASDAQ:CNXN) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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, the ROCE of PC Connection (NASDAQ:CNXN) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

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 PC Connection:

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

0.16 = US$124m ÷ (US$1.1b - US$367m) (Based on the trailing twelve months to June 2022).

Thus, PC Connection has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Electronic industry.

Check out our latest analysis for PC Connection

In the above chart we have measured PC Connection's 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 PC Connection here for free.

What Does the ROCE Trend For PC Connection Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 58% in that time. 16% is a pretty standard return, and it provides some comfort knowing that PC Connection has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

In the end, PC Connection has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 113% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

PC Connection does have some risks though, and we've spotted 1 warning sign for PC Connection that you might be interested in.

While PC Connection may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.