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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. That's why when we briefly looked at Parsons' (NYSE:PSN) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Parsons, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$340m ÷ (US$4.8b - US$1.4b) (Based on the trailing twelve months to December 2023).
Therefore, Parsons has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Professional Services industry average it falls behind.
In the above chart we have measured Parsons' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Parsons .
The Trend Of ROCE
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 111% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Parsons 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.
In Conclusion...
In the end, Parsons has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
While Parsons doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for PSN on our platform.
While Parsons 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.
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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.