We Like These Underlying Return On Capital Trends At P.A.M. Transportation Services (NASDAQ:PTSI)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at P.A.M. Transportation Services (NASDAQ:PTSI) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.14 = US$61m ÷ (US$571m - US$122m) (Based on the trailing twelve months to June 2021).

So, P.A.M. Transportation Services has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Transportation industry average of 11%.

See our latest analysis for P.A.M. Transportation Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for P.A.M. Transportation Services' ROCE against it's prior returns. If you're interested in investigating P.A.M. Transportation Services' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From P.A.M. Transportation Services' ROCE Trend?

We like the trends that we're seeing from P.A.M. Transportation Services. Over the last five years, returns on capital employed have risen substantially to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 59%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

In summary, it's great to see that P.A.M. Transportation Services can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 244% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching P.A.M. Transportation Services, you might be interested to know about the 3 warning signs that our analysis has discovered.

While P.A.M. Transportation Services 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.

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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.
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