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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Pan African Resources' (LON:PAF) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Pan African Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$107m ÷ (US$849m - US$87m) (Based on the trailing twelve months to December 2024).
So, Pan African Resources has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.3% it's much better.
Check out our latest analysis for Pan African Resources
Above you can see how the current ROCE for Pan African Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pan African Resources for free.
What Can We Tell From Pan African Resources' ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has employed 123% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Pan African Resources has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line
In the end, Pan African Resources has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 350% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Pan African Resources does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...