Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at PetIQ (NASDAQ:PETQ) so let's look a bit deeper.
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. Analysts use this formula to calculate it for PetIQ:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$47m ÷ (US$883m - US$192m) (Based on the trailing twelve months to June 2023).
Therefore, PetIQ has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.5%.
See our latest analysis for PetIQ
Above you can see how the current ROCE for PetIQ compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PetIQ.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 112% more capital is being employed now too. So we're very much inspired by what we're seeing at PetIQ thanks to its ability to profitably reinvest capital.
The Bottom Line On PetIQ's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what PetIQ has. Astute investors may have an opportunity here because the stock has declined 52% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
While PetIQ looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether PETQ is currently trading for a fair price.
While PetIQ may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.