Under the hood, the feedback from People Infrastructure (ASX: PPE) is impressive
To find multi-bagger stock, what are the underlying trends we need to look for in a business? Ideally, a business will display two trends; first growth return on capital employed (ROCE) and on the other hand, an increase amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. So when we looked at the ROCE trend of People infrastructure (ASX: PPE) we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on People Infrastructure is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.21 = A $ 28 million ÷ (A $ 165 million – A $ 33 million) (Based on the last twelve months up to December 2020).
Therefore, People Infrastructure has a ROCE of 21%. In absolute terms, this is an excellent performance and is even better than the professional services industry average of 14%.
Check out our latest analysis for People Infrastructure
In the graph above, we measured People Infrastructure’s past ROCE against past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What is the trend for returns?
We love the trends we see at People Infrastructure. Over the past three years, returns on capital employed have increased substantially to 21%. Basically the business is making more per dollar of capital invested and on top of that 259% more capital is also being used now. This may indicate that there are many opportunities to invest capital in-house and at ever higher rates, a common combination among multi-baggers.
In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 20%, which means overall that the company relies less on its suppliers or its short-term creditors to finance its operations. Therefore, we can be assured that ROCE growth is the result of fundamental company improvements, rather than a cooking class featuring that company’s books.
The key to take away
In summary, it’s great to see that People Infrastructure can increase returns by systematically reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought-after multi-baggers. And a remarkable 200% total return over the past three years tells us that investors are expecting more good things in the future. So, given that the stock has proven to have some promising trends, it is worth doing more research on the company to see if these trends are likely to continue.
On a final note, we found 2 warning signs for People Infrastructure that we think you should be aware of.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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