Returns Are Gaining Momentum At P.A.M. Transportation Services (NASDAQ:PTSI)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at P.A.M. Transportation Services (NASDAQ:PTSI) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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 P.A.M. Transportation Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$75m ÷ (US$705m - US$115m) (Based on the trailing twelve months to June 2023).
Therefore, P.A.M. Transportation Services has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Transportation industry.
View our latest analysis for P.A.M. Transportation Services
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 to see what analysts are forecasting going forward, you should check out our free report for P.A.M. Transportation Services.
What Does the ROCE Trend For P.A.M. Transportation Services Tell Us?
P.A.M. Transportation Services is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 88%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From P.A.M. Transportation Services' 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 P.A.M. Transportation Services has. Since the stock has returned a solid 58% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.
If you want to continue researching P.A.M. Transportation Services, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
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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.
