Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Pagaya Technologies (NASDAQ:PGY) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Pagaya Technologies is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0064 = US$8.4m ÷ (US$1.5b - US$169m) (Based on the trailing twelve months to March 2024).

Thus, Pagaya Technologies has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Software industry average of 7.2%.

View our latest analysis for Pagaya Technologies

In the above chart we have measured Pagaya Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Pagaya Technologies for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Pagaya Technologies' ROCE has reduced by 75% over the last four years, while the business employed 1,320% more capital. Usually this isn't ideal, but given Pagaya Technologies conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Pagaya Technologies might not have received a full period of earnings contribution from it.

Our Take On Pagaya Technologies' ROCE

While returns have fallen for Pagaya Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 89% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing to note, we've identified 2 warning signs with Pagaya Technologies and understanding these should be part of your investment process.

While Pagaya Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.