Performant Financial Corporation [NASDAQ: PFMT] is in a correction after days of gains. At this point investors may be wondering whether it is a reversal, or it’s a bullish continuation pattern. Recently, analysts offered their take on it, and it comes across as a potentially good stock to watch. Key among the aspects highlighted was the returns on capital employed (ROCE). The ROCE should be increasing, while the capital employed should be growing. In simple terms, such kind of businesses keeps reinvesting their capital, hence increasing their rates of return. They are synonymous with a compounding interest investment. Performant Financial has shown some indications of behaving similarly.
Just to make these business terms a bit clear, ROCE is the amount of profit a business makes from invested capital before tax. You should take the total earnings before factoring interests and taxes, and divide that figure with after subtracting current liabilities from total assets. Following this calculation, Performant Financial has a ROCE of 6.5%. This rate is way below the industry’s average of 10% but could be increased.
It is always vital to check out the past performance of companies to try and predict their possible performance in the future. Performant Financial, though still under the industry’s average, seems to be showing promise in terms of ROCE growth. In just the last five years, returns on capital for the company have risen by a massive 253%. This trend is a good sign since the growth indicates some earnings for every dollar invested in the company. In terms of capital employed, Performant Financial is doing very well. The firm is operating with only 48% of its capital. This shrinking of capital is not a positive sign of a company that wants to become a multi-bagger soon enough.
Despite that shortcoming, the company still can increase its capital spending for better or higher returns. Performant is doing well with its limited spending, an indication that it could perform even better. It has been able to rediscover its tendencies as is evident with its returns while operation on lower amounts of capital. If you are an investor, this growth should tell you something, and you should be considering staking your capital for some handsome returns. The company’s stock has in the last five years fallen by 61%. With the growth that is now showing, you would expect their stock to rise exponentially in the next five years. It may not bring instant returns; it could have promising returns in the long run. Focus on the long term.