Does Performant Financial (NASDAQ:PFMT) Have The Makings Of A Multi-Bagger?

Simply Wall St
·3 min read

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Performant Financial (NASDAQ:PFMT) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Performant Financial:

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

0.065 = US$6.5m ÷ (US$117m - US$16m) (Based on the trailing twelve months to June 2020).

Therefore, Performant Financial has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10.0%.

Check out our latest analysis for Performant Financial

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Performant Financial's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Performant Financial Tell Us?

Performant Financial has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 253%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Performant Financial appears to been achieving more with less, since the business is using 48% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

In summary, it's great to see that Performant Financial has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 3 warning signs with Performant Financial (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Performant Financial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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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