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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating P.A.M. Transportation Services (NASDAQ:PTSI), we don't think it's current trends fit the mold of a multi-bagger.
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)
0.083 = US$50m ÷ (US$732m - US$136m) (Based on the trailing twelve months to September 2023).
Therefore, P.A.M. Transportation Services has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Transportation industry average of 9.2%.
View our latest analysis for P.A.M. Transportation Services
Above you can see how the current ROCE for P.A.M. Transportation Services 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 P.A.M. Transportation Services.
What The Trend Of ROCE Can Tell Us
In terms of P.A.M. Transportation Services' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.3% and the business has deployed 76% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
Long story short, while P.A.M. Transportation Services has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 27% 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.
On a separate note, we've found 1 warning sign for P.A.M. Transportation Services you'll probably want to know about.
While P.A.M. Transportation Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.