If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. So when we looked pinterest (NYSE:PINS) and its ROCE trend, we really liked what we saw.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Pinterest:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = $394 million ÷ ($3.6 billion – $226 million) (Based on the last twelve months to March 2022).
Thereby, Pinterest has a ROCE of 12%. In absolute terms, that’s a decent return, but compared to the interactive media and services industry average of 5.6%, it’s much better.
See our latest analysis for Pinterest
In the chart above, we’ve measured Pinterest’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out forecasts from analysts covering Pinterest here for free.
What the ROCE trend can tell us
Pinterest recently achieved profitability, so its earlier investments appear to be paying off. About four years ago, the company was generating losses, but things have reversed as it now earns 12% on its capital. Not only that, but the company is using 215% more capital than before, but that’s to be expected of a company trying to become profitable. This can tell us that the business has plenty of reinvestment opportunities that can generate higher returns.
The Key Takeaway
Long story short, we’re thrilled to see that Pinterest’s reinvestment activities have paid off and the company is now profitable. Given that the stock is down 22% in the last three years, it could be a good investment if the valuation and other metrics are also attractive. That said, research into the company’s current valuation metrics and future prospects seems appropriate.
One more thing to note, we have identified 3 warning signs with Pinterest and understanding them should be part of your investing process.
Although Pinterest does not generate the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.