To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Pitney Bowes (NYSE:PBI) so let's look a bit deeper.

Our free stock report includes 3 warning signs investors should be aware of before investing in Pitney Bowes. Read for free now.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Pitney Bowes is:

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

0.13 = US$223m ÷ (US$3.4b - US$1.7b) (Based on the trailing twelve months to December 2024).

Therefore, Pitney Bowes has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 11% it's much better.

Check out our latest analysis for Pitney Bowes

Above you can see how the current ROCE for Pitney Bowes compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pitney Bowes for free.

How Are Returns Trending?

Pitney Bowes has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 118%. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, Pitney Bowes appears to been achieving more with less, since the business is using 56% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 49% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

From what we've seen above, Pitney Bowes has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 253% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 3 warning signs with Pitney Bowes (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Pitney Bowes 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.