Here's What To Make Of Pro-Dex's (NASDAQ:PDEX) Decelerating Rates Of Return
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, the ROCE of Pro-Dex (NASDAQ:PDEX) looks decent, right now, so lets see what the trend of returns can tell us.
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 Pro-Dex:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$4.5m ÷ (US$40m - US$5.9m) (Based on the trailing twelve months to June 2021).
Therefore, Pro-Dex has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Medical Equipment industry.
Check out our latest analysis for Pro-Dex
Above you can see how the current ROCE for Pro-Dex 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 Pro-Dex here for free.
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 283% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Pro-Dex's ROCE
In the end, Pro-Dex has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 491% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One final note, you should learn about the 5 warning signs we've spotted with Pro-Dex (including 2 which are concerning) .
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.
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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