If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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, the ROCE of Pearl Global Industries (NSE:PGIL) looks decent, right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for Pearl Global Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = ₹922m ÷ (₹18b – ₹9.1b) (Based on the trailing twelve months to March 2022).
Thus, Pearl Global Industries has an ROCE of 11%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Luxury industry average of 13%.
Check out our latest analysis for Pearl Global Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for Pearl Global Industries’ ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pearl Global Industries, check out these free graphs here.
What Does the ROCE Trend For Pearl Global Industries Tell Us?
While the returns on capital are good, they haven’t moved much. The company has employed 81% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Pearl Global Industries has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a separate but related note, it’s important to know that Pearl Global Industries has a current liabilities to total assets ratio of 51%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Pearl Global Industries’ ROCE
To sum it up, Pearl Global Industries has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 124% return they’ve received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you’d like to know more about Pearl Global Industries, we’ve spotted 5 warning signs, and 2 of them are a bit unpleasant.
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.