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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Paychex’s (NASDAQ:PAYX) trend of ROCE, we really 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 Paychex:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.43 = US$2.2b ÷ (US$10b – US$5.3b) (Based on the trailing twelve months to May 2024).
So, Paychex has an ROCE of 43%. That’s a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
Check out our latest analysis for Paychex
In the above chart we have measured Paychex’s 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 Paychex .
So How Is Paychex’s ROCE Trending?
It’s hard not to be impressed by Paychex’s returns on capital. The company has employed 32% more capital in the last five years, and the returns on that capital have remained stable at 43%. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
On a side note, Paychex’s current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Paychex’s ROCE
Paychex has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On a separate note, we’ve found 1 warning sign for Paychex you’ll probably want to know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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