Returns At PCTEL (NASDAQ:PCTI) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at PCTEL (NASDAQ:PCTI) and its trend of ROCE, we really liked what we saw.

What is 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. 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$3.5m ÷ (US$88m - US$12m) (Based on the trailing twelve months to December 2020).

Thus, PCTEL has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 8.9%.

See our latest analysis for PCTEL

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

What Can We Tell From PCTEL's ROCE Trend?

It's great to see that PCTEL has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 4.6% which is no doubt a relief for some early shareholders. In regards to capital employed, PCTEL is using 25% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. PCTEL could be selling under-performing assets since the ROCE is improving.

The Bottom Line

In the end, PCTEL has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 3 warning signs with PCTEL and understanding them should be part of your investment process.

While PCTEL isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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