If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at P.A.M. Transportation Services (NASDAQ:PTSI), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for P.A.M. Transportation Services:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$6.5m ÷ (US$734m - US$112m) (Based on the trailing twelve months to June 2024).
Therefore, P.A.M. Transportation Services has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.1%.
In the above chart we have measured P.A.M. Transportation Services' 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 analyst report for P.A.M. Transportation Services .
What Does the ROCE Trend For P.A.M. Transportation Services Tell Us?
When we looked at the ROCE trend at P.A.M. Transportation Services, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.1% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From P.A.M. Transportation Services' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for P.A.M. Transportation Services have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 42% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know more about P.A.M. Transportation Services, we've spotted 4 warning signs, and 1 of them is a bit concerning.
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.
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