If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Powermatic Data Systems (SGX:BCY) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Powermatic Data Systems, this is the formula:

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

0.15 = S$11m ÷ (S$85m - S$11m) (Based on the trailing twelve months to March 2023).

Thus, Powermatic Data Systems has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Communications industry.

View our latest analysis for Powermatic Data Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Powermatic Data Systems' ROCE against it's prior returns. If you'd like to look at how Powermatic Data Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Powermatic Data Systems' ROCE Trend?

We like the trends that we're seeing from Powermatic Data Systems. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at Powermatic Data Systems thanks to its ability to profitably reinvest capital.

The Bottom Line On Powermatic Data Systems' ROCE

In summary, it's great to see that Powermatic Data Systems 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 144% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.