We Like These Underlying Return On Capital Trends At Pure Cycle (NASDAQ:PCYO)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Pure Cycle (NASDAQ:PCYO) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pure Cycle, this is the formula:

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

0.089 = US$12m ÷ (US$147m - US$9.3m) (Based on the trailing twelve months to August 2024).

Therefore, Pure Cycle has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 4.8%.

Check out our latest analysis for Pure Cycle

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pure Cycle's ROCE against it's prior returns. If you'd like to look at how Pure Cycle has performed in the past in other metrics, you can view this free graph of Pure Cycle's past earnings, revenue and cash flow.

So How Is Pure Cycle's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.9%. 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.

The Key Takeaway

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. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 1 warning sign for Pure Cycle you'll probably want to know about.

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.