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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Preformed Line Products (NASDAQ:PLPC) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Preformed Line Products:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$45m ÷ (US$483m - US$107m) (Based on the trailing twelve months to June 2021).
Therefore, Preformed Line Products has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Preformed Line Products' ROCE against it's prior returns. If you'd like to look at how Preformed Line Products has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Preformed Line Products' ROCE Trend?
The trends we've noticed at Preformed Line Products are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 31%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
To sum it up, Preformed Line Products has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 88% 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 Preformed Line Products can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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. 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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