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Investors Will Want Preformed Line Products' (NASDAQ:PLPC) Growth In ROCE To Persist

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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Preformed Line Products (NASDAQ:PLPC) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Preformed Line Products, this is the formula:

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

0.11 = US$41m ÷ (US$494m - US$114m) (Based on the trailing twelve months to September 2021).

Thus, Preformed Line Products has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.3% generated by the Electrical industry.

Check out our latest analysis for Preformed Line Products

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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'd like to look at how Preformed Line Products has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Preformed Line Products' ROCE Trend?

We like the trends that we're seeing from Preformed Line Products. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 31%. So we're very much inspired by what we're seeing at Preformed Line Products thanks to its ability to profitably reinvest capital.

What We Can Learn From Preformed Line Products' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Preformed Line Products has. Considering the stock has delivered 20% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.