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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, PCTEL (NASDAQ:PCTI) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for PCTEL:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$3.4m ÷ (US$85m - US$9.4m) (Based on the trailing twelve months to September 2020).
Thus, PCTEL has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.5%.
Above you can see how the current ROCE for PCTEL 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 PCTEL.
The Trend Of ROCE
While the ROCE is still rather low for PCTEL, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 329%. The company is now earning US$0.04 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On PCTEL's ROCE
From what we've seen above, PCTEL has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 86% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if PCTEL can keep these trends up, it could have a bright future ahead.
PCTEL does have some risks though, and we've spotted 3 warning signs for PCTEL that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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