To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, PCTEL (NASDAQ:PCTI) looks quite promising in regards to its trends of return on capital.
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 PCTEL:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$3.4m ÷ (US$85m - US$9.4m) (Based on the trailing twelve months to September 2020).
Thus, PCTEL has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 9.2%.
Above you can see how the current ROCE for PCTEL compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
While the ROCE is still rather low for PCTEL, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 329%. The company is now earning US$0.04 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. PCTEL may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On PCTEL's ROCE
In the end, PCTEL has proven it's capital allocation skills are good with those higher returns from less amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 76% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a separate note, we've found 1 warning sign for PCTEL you'll probably want to know about.
While PCTEL 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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