Yahoo Finance Petra Diamonds (LON:PDL) Is Looking To Continue Growing Its Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. 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. Speaking of which, we noticed some great changes in Petra Diamonds' (LON:PDL) returns on capital, so let's have a look.
Understanding 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 Petra Diamonds, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$118m ÷ (US$937m - US$85m) (Based on the trailing twelve months to December 2022).
Thus, Petra Diamonds has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 9.7% it's much better.
Check out our latest analysis for Petra Diamonds
Above you can see how the current ROCE for Petra Diamonds compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Petra Diamonds.
The Trend Of ROCE
Petra Diamonds has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 252% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 45% less capital than it was five years ago. Petra Diamonds may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In a nutshell, we're pleased to see that Petra Diamonds has been able to generate higher returns from less capital. And since the stock has dived 97% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
Like most companies, Petra Diamonds does come with some risks, and we've found 1 warning sign that you should be aware of.
While Petra Diamonds 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.
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