What are the early trends to look for to identify a stock that could multiply in value over the long term? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Therefore, when we briefly examined Pearl Global Industries’ (NSE:PGIL) ROCE trend, we were pretty happy with what we saw.
Understanding return on capital employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for Pearl Global Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = ₹851m ÷ (₹15b – ₹6.6b) (Based on the last twelve months to December 2021).
So, Pearl Global Industries has a ROCE of 10%. In absolute terms, that’s a pretty standard performer, but compared to the luxury industry average, it lags behind.
See our latest analysis for Pearl Global Industries
Historical performance is a great starting point when researching a stock. So above you can see the gauge of Pearl Global Industries’ ROCE compared to its past returns. If you would like to see how Pearl Global Industries has performed in the past in other metrics, you can see this free chart of past profits, revenue and cash flow.
What the ROCE trend can tell us
The ROCE trend isn’t showing much, but overall returns are decent. The company has consistently gained 10% over the past five years and the capital employed within the company has increased by 84% over this period. 10% is a pretty standard return, and it’s reassuring knowing that Pearl Global Industries has always earned that amount. Over long periods of time, returns like these may not be too exciting, but with consistency they can pay off in terms of stock price performance.
On a separate but related note, it is important to know that Pearl Global Industries has a current liabilities to total assets ratio of 45%, which we consider quite high. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
Pearl Global Industries ROCE Basics
The main thing to remember is that Pearl Global Industries has proven its ability to continuously reinvest at respectable rates of return. And long-term investors would be delighted with the 184% return they’ve received over the past five years. So while the stock may be more “expensive” than it was before, we believe the strong fundamentals warrant this stock for further research.
Finally, we found 3 warning signs for Pearl Global Industries (2 cannot be ignored) which you should be aware of.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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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.