Packaging Corporation of America (NYSE:PKG) could become a multi-bagger
What are the early trends to look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we looked at the ROCE trend of Packing Company of America (NYSE: PKG) we really liked what we saw.
Return on capital employed (ROCE): what is it?
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 Packaging Corporation of America:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = $1.4 billion ÷ ($8.1 billion – $968 million) (Based on the last twelve months to March 2022).
So, Packaging Corporation of America has a ROCE of 20%. In absolute terms, this is an excellent return and is even better than the packaging industry average of 9.0%.
See our latest analysis for Packaging Corporation of America
Above, you can see how Packaging Corporation of America’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So what is the Packaging Corporation of America ROCE trend?
The trends we’ve noticed at Packaging Corporation of America are quite reassuring. Over the past five years, return on capital employed has increased substantially to 20%. The amount of capital employed also increased by 41%. So we’re very inspired by what we’re seeing in Packaging Corporation of America with its ability to reinvest capital profitably.
Our view on Packaging Corporation of America’s ROCE
In summary, Packaging Corporation of America has proven that it can reinvest in the business and generate higher returns on that capital employed, which is great. And investors seem to expect more in the future, as the stock has rewarded shareholders with an 80% return over the past five years. In light of that, we think it’s worth taking a closer look at this stock, because if Packaging Corporation of America can maintain these trends, it could have a bright future ahead of it.
If you want to know more about the risks faced by Packaging Corporation of America, we found out 2 warning signs of which you should be aware.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating 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.