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. 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Pinterest’s (NYSE:PINS) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed 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)
0.057 = US$190m ÷ (US$3.7b – US$340m) (Based on the trailing twelve months to March 2024).
So, Pinterest has an ROCE of 5.7%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 6.4%.
Check out our latest analysis for Pinterest
roce
In the above chart we have measured Pinterest’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Pinterest for free.
The Trend Of ROCE
We’re delighted to see that Pinterest is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.7% on its capital. Not only that, but the company is utilizing 227% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
Long story short, we’re delighted to see that Pinterest’s reinvestment activities have paid off and the company is now profitable. And with a respectable 48% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
If you’d like to know about the risks facing Pinterest, we’ve discovered 1 warning sign that you should be aware of.
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While Pinterest 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
