If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Pilbara Minerals' (ASX:PLS) look very promising so lets take a look.

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. To calculate this metric for Pilbara Minerals, this is the formula:

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

0.47 = AU$1.8b ÷ (AU$4.4b - AU$552m) (Based on the trailing twelve months to December 2023).

Therefore, Pilbara Minerals has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Pilbara Minerals

Above you can see how the current ROCE for Pilbara Minerals 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 Pilbara Minerals for free.

What Does the ROCE Trend For Pilbara Minerals Tell Us?

Pilbara Minerals has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 47% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Pilbara Minerals is utilizing 705% 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.

The Key Takeaway

In summary, it's great to see that Pilbara Minerals has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Pilbara Minerals, we've discovered 2 warning signs that you should be aware of.