Shareholders Would Enjoy A Repeat Of CPI Card Group's (NASDAQ:PMTS) Recent Growth In Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in CPI Card Group's (NASDAQ:PMTS) returns on capital, so let's have a look.

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 CPI Card Group, this is the formula:

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

0.22 = US$55m ÷ (US$320m - US$74m) (Based on the trailing twelve months to March 2024).

Thus, CPI Card Group has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.6% earned by companies in a similar industry.

Check out our latest analysis for CPI Card Group

In the above chart we have measured CPI Card Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for CPI Card Group .

What Can We Tell From CPI Card Group's ROCE Trend?

The trends we've noticed at CPI Card Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 22%. The amount of capital employed has increased too, by 45%. So we're very much inspired by what we're seeing at CPI Card Group thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, CPI Card Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 704% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

One more thing: We've identified 4 warning signs with CPI Card Group (at least 1 which is potentially serious) , and understanding them would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.