PCTEL (NASDAQ:PCTI) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, PCTEL (NASDAQ:PCTI) looks quite promising in regards to its trends of return on capital.

Understanding 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 PCTEL, this is the formula:

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

0.046 = US$3.4m ÷ (US$90m - US$17m) (Based on the trailing twelve months to December 2022).

Therefore, PCTEL has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Communications industry average of 11%.

View our latest analysis for PCTEL

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'd like, you can check out the forecasts from the analysts covering PCTEL here for free.

What Can We Tell From PCTEL's ROCE Trend?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 124% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

As discussed above, PCTEL appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 25% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 4 warning signs with PCTEL (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.

What are the risks and opportunities for PCTEL?

NasdaqGS:PCTI

PCTEL

PCTEL, Inc., together with its subsidiaries, provides industrial Internet of Thing devices (IoT), antenna systems, and test and measurement solutions worldwide.Show more

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Rewards

• Earnings are forecast to grow 17.25% per year

• Earnings grew by 1775.2% over the past year

Risks

• Does not have a meaningful market cap ($79M)

• Shareholders have been diluted in the past year

• Large one-off items impacting financial results

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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.