If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at PNC Process Systems (SHSE:603690), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for PNC Process Systems, this is the formula:

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

0.054 = CN¥365m ÷ (CN¥12b - CN¥5.0b) (Based on the trailing twelve months to September 2023).

So, PNC Process Systems has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.1%.

View our latest analysis for PNC Process Systems

Above you can see how the current ROCE for PNC Process Systems 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 PNC Process Systems.

What Does the ROCE Trend For PNC Process Systems Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 1,229%. That being said, PNC Process Systems raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. PNC Process Systems probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Additionally, we found that PNC Process Systems' most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a side note, PNC Process Systems has done well to pay down its current liabilities to 42% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that PNC Process Systems is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 90% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, PNC Process Systems does come with some risks, and we've found 2 warning signs that you should be aware of.

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

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.