Yahoo Finance Panoramic Resources (ASX:PAN) Is Doing The Right Things To Multiply Its Share Price
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Panoramic Resources (ASX:PAN) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 Panoramic Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = AU$3.9m ÷ (AU$301m - AU$49m) (Based on the trailing twelve months to June 2022).
So, Panoramic Resources has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 10%.
Check out our latest analysis for Panoramic Resources
In the above chart we have measured Panoramic Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Panoramic Resources.
What Does the ROCE Trend For Panoramic Resources Tell Us?
Panoramic Resources has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Panoramic Resources is utilizing 77% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 16% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Panoramic Resources' ROCE
Long story short, we're delighted to see that Panoramic Resources' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 18% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know more about Panoramic Resources, we've spotted 2 warning signs, and 1 of them is a bit concerning.
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.
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