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Pure Storage (NYSE:PSTG) Is Looking To Continue Growing Its Returns On Capital

·3 min read

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Pure Storage's (NYSE:PSTG) returns on capital, so let's have a look.

What Is 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 Pure Storage:

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

0.014 = US$21m ÷ (US$3.0b - US$1.5b) (Based on the trailing twelve months to August 2022).

Therefore, Pure Storage has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 10%.

See our latest analysis for Pure Storage

roce
roce

Above you can see how the current ROCE for Pure Storage compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pure Storage.

What Can We Tell From Pure Storage's ROCE Trend?

Pure Storage has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Pure Storage is utilizing 150% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 50% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Pure Storage's ROCE

To the delight of most shareholders, Pure Storage has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

While Pure Storage 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.

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.

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