A Look Into Packaging Corporation of America's (NYSE:PKG) Impressive Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Packaging Corporation of America's (NYSE:PKG) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Packaging Corporation of America, this is the formula:

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

0.21 = US$1.6b ÷ (US$8.3b - US$963m) (Based on the trailing twelve months to September 2022).

Therefore, Packaging Corporation of America has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Packaging Corporation of America

roce

Above you can see how the current ROCE for Packaging Corporation of America 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 Packaging Corporation of America.

How Are Returns Trending?

We'd be pretty happy with returns on capital like Packaging Corporation of America. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 42% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Packaging Corporation of America can keep this up, we'd be very optimistic about its future.

The Bottom Line On Packaging Corporation of America's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last five years, the stock has only delivered a 25% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Packaging Corporation of America (including 1 which is potentially serious) .

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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