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# Should You Like P.A.M. Transportation Services, Inc.’s (NASDAQ:PTSI) High Return On Capital Employed?

Today we'll evaluate P.A.M. Transportation Services, Inc. (NASDAQ:PTSI) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

### So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for P.A.M. Transportation Services:

0.13 = US\$50m ÷ (US\$473m - US\$103m) (Based on the trailing twelve months to June 2019.)

So, P.A.M. Transportation Services has an ROCE of 13%.

### Is P.A.M. Transportation Services's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that P.A.M. Transportation Services's ROCE is meaningfully better than the 11% average in the Transportation industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where P.A.M. Transportation Services sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that P.A.M. Transportation Services currently has an ROCE of 13%, compared to its ROCE of 8.0% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how P.A.M. Transportation Services's ROCE compares to its industry. Click to see more on past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

### How P.A.M. Transportation Services's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

P.A.M. Transportation Services has total liabilities of US\$103m and total assets of US\$473m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. Low current liabilities are not boosting the ROCE too much.

### Our Take On P.A.M. Transportation Services's ROCE

This is good to see, and with a sound ROCE, P.A.M. Transportation Services could be worth a closer look. P.A.M. Transportation Services shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like P.A.M. Transportation Services better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.