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. 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 PWR Holdings' (ASX:PWH) ROCE trend, we were very happy with what we saw.

What Is 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 PWR Holdings, this is the formula:

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

0.30 = AU$28m ÷ (AU$110m - AU$15m) (Based on the trailing twelve months to December 2022).

So, PWR Holdings has an ROCE of 30%.  In absolute terms that's a great return and it's even better than the Auto Components industry average of 9.6%.

View our latest analysis for PWR Holdings  roce

Above you can see how the current ROCE for PWR Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering PWR Holdings here  for free.

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by PWR Holdings' returns on capital. Over the past five years, ROCE has remained relatively flat at around 30% and the business has deployed 144% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If PWR Holdings can keep this up, we'd be very optimistic about its future.

The Bottom Line On PWR Holdings' ROCE

In summary, we're delighted to see that PWR Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 387% 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.



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'd like to see other companies earning high returns, check out our freelist of companies earning high returns with solid balance sheets 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.

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