Pure Cycle's (NASDAQ:PCYO) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Pure Cycle's (NASDAQ:PCYO) 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. The formula for this calculation on Pure Cycle is:

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

0.034 = US$4.5m ÷ (US$140m - US$9.0m) (Based on the trailing twelve months to May 2024).

Therefore, Pure Cycle has an ROCE of 3.4%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 4.3%.

View our latest analysis for Pure Cycle

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pure Cycle.

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 3.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 83% more capital is being employed now too. So we're very much inspired by what we're seeing at Pure Cycle thanks to its ability to profitably reinvest capital.

What We Can Learn From Pure Cycle's ROCE

To sum it up, Pure Cycle has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Pure Cycle that you might find interesting.

While Pure Cycle 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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