If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Pure Storage (NYSE:PSTG) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Pure Storage:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = US$147m ÷ (US$3.8b - US$1.3b) (Based on the trailing twelve months to August 2024).
Thus, Pure Storage has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Tech industry average of 8.4%.
View our latest analysis for Pure Storage
In the above chart we have measured Pure Storage'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 Pure Storage .
What Can We Tell From Pure Storage's ROCE Trend?
Pure Storage has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 5.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Pure Storage is utilizing 56% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From Pure Storage's ROCE
Long story short, we're delighted to see that Pure Storage's reinvestment activities have paid off and the company is now profitable. And a remarkable 163% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Pure Storage can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Pure Storage, we've discovered 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About NYSE:PSTG
Pure Storage
Engages in the provision of data storage and management technologies, products, and services in the United States and internationally.
Flawless balance sheet with high growth potential.
