If you’re looking for a multi-bagger, there are a few things to watch out for. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. Therefore, when we briefly examined Palms Sports PJSC (ADX:PALMS) ROCE trend, we were very pleased with what we saw.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Palms Sports PJSC, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = Ï.å80m ÷ (ï.å376m – ï.å18m) (Based on the last twelve months to December 2021).
Thereby, Palms Sports PJSC has a ROCE of 22%. In absolute terms, that’s an excellent return and even better than the entertainment industry average of 7.5%.
Check out our latest analysis for Palms Sports PJSC
Historical performance is a great starting point when researching a stock. So you can see Palms Sports PJSC’s ROCE gauge above compared to its past returns. If you want to dive deep into Palms Sports PJSC’s earnings, revenue, and cash flow history, check out these free graphics here.
The ROCE trend
Palms Sports PJSC deserves credit for their comebacks. Over the past two years, ROCE has remained relatively stable at around 22% and the company has deployed 38% more capital into its operations. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Incidentally, Palms Sports PJSC has been quite successful in reducing current liabilities to 4.7% of total assets over the past two years. Indeed, suppliers now finance the company less, which can reduce certain elements of risk.
The Key Takeaway
In short, we would say that Palms Sports PJSC has the makings of a multi-bagger since it has been able to compound its capital at very profitable rates of return. However, despite favorable fundamentals, the stock has fallen 26% in the past year, so there could be an opportunity here for shrewd investors. Therefore we think it would be worth taking this stock further given that the fundamentals are attractive.
On a separate note, we found 1 warning sign for Palms Sports PJSC you will probably want to know more.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.