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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating P.A.M. Transportation Services (NASDAQ:PTSI), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on P.A.M. Transportation Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = US$34m ÷ (US$579m - US$130m) (Based on the trailing twelve months to December 2020).
So, P.A.M. Transportation Services has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.7%.
In the above chart we have measured P.A.M. Transportation Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering P.A.M. Transportation Services here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at P.A.M. Transportation Services doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.7% from 11% five years ago. However it looks like P.A.M. Transportation Services might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On P.A.M. Transportation Services' ROCE
To conclude, we've found that P.A.M. Transportation Services is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 91% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing to note, we've identified 2 warning signs with P.A.M. Transportation Services and understanding them should be part of your investment process.
While P.A.M. Transportation Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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. 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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