If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at P.A.M. Transportation Services (NASDAQ:PTSI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. Analysts use this formula to calculate it for P.A.M. Transportation Services:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = US$13m ÷ (US$512m - US$126m) (Based on the trailing twelve months to March 2020).
So, P.A.M. Transportation Services has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 11%.
Above you can see how the current ROCE for P.A.M. Transportation Services 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 P.A.M. Transportation Services here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at P.A.M. Transportation Services doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.5% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On P.A.M. Transportation Services' ROCE
To conclude, we've found that P.A.M. Transportation Services is reinvesting in the business, but returns have been falling. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think P.A.M. Transportation Services has the makings of a multi-bagger.
If you want to know some of the risks facing P.A.M. Transportation Services we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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. 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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