What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Preformed Line Products (NASDAQ:PLPC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Preformed Line Products is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.084 = US$40m ÷ (US$592m - US$114m) (Based on the trailing twelve months to September 2024).

Thus, Preformed Line Products has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Electrical industry average of 10%.

See our latest analysis for Preformed Line Products

Historical performance is a great place to start when researching a stock so above you can see the gauge for Preformed Line Products' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Preformed Line Products.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Preformed Line Products in recent years. Over the past five years, ROCE has remained relatively flat at around 8.4% and the business has deployed 40% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Preformed Line Products' ROCE

As we've seen above, Preformed Line Products' returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 207% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Preformed Line Products does have some risks though, and we've spotted 1 warning sign for Preformed Line Products that you might be interested in.

While Preformed Line Products 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.