Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, PubMatic (NASDAQ:PUBM) looks quite promising in regards to its trends of return on capital.
Understanding 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. The formula for this calculation on PubMatic is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$56m ÷ (US$570m - US$255m) (Based on the trailing twelve months to June 2022).
Thus, PubMatic has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Media industry.
In the above chart we have measured PubMatic'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 report for PubMatic.
How Are Returns Trending?
The trends we've noticed at PubMatic are quite reassuring. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 18%. The amount of capital employed has increased too, by 241%. So we're very much inspired by what we're seeing at PubMatic thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that PubMatic has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In summary, it's great to see that PubMatic can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 34% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
PubMatic does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.
While PubMatic isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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