There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Penske Automotive Group (NYSE:PAG) looks quite promising in regards to its trends of return on capital.
What Is 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. Analysts use this formula to calculate it for Penske Automotive Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$1.3b ÷ (US$17b - US$6.8b) (Based on the trailing twelve months to September 2024).
Therefore, Penske Automotive Group has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
In the above chart we have measured Penske Automotive Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Penske Automotive Group .
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Penske Automotive Group. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 24%. So we're very much inspired by what we're seeing at Penske Automotive Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that Penske Automotive Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 247% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we found 2 warning signs for Penske Automotive Group (1 is a bit concerning) you should be aware of.
While Penske Automotive Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
