The Returns On Capital At Pro-Dex (NASDAQ:PDEX) Don't Inspire Confidence
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Pro-Dex (NASDAQ:PDEX) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pro-Dex, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$6.3m ÷ (US$51m - US$10.0m) (Based on the trailing twelve months to December 2023).
Thus, Pro-Dex has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Medical Equipment industry.
See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Pro-Dex .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Pro-Dex, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 15%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Pro-Dex's ROCE
To conclude, we've found that Pro-Dex is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing to note, we've identified 3 warning signs with Pro-Dex and understanding these should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
