If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Palo Alto Networks' (NASDAQ:PANW) returns on capital, so let's have a look.

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 Palo Alto Networks, this is the formula:

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

0.074 = US$960m ÷ (US$20b - US$7.4b) (Based on the trailing twelve months to October 2024).

So, Palo Alto Networks has an ROCE of 7.4%. On its own, that's a low figure but it's around the 9.0% average generated by the Software industry.

In the above chart we have measured Palo Alto Networks' 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 Palo Alto Networks for free.

What Does the ROCE Trend For Palo Alto Networks Tell Us?

We're delighted to see that Palo Alto Networks is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 7.4% on its capital. In addition to that, Palo Alto Networks is employing 172% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Palo Alto Networks' ROCE

Long story short, we're delighted to see that Palo Alto Networks' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 406% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Palo Alto Networks can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Palo Alto Networks (at least 1 which is concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.