There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Palantir Technologies (NYSE:PLTR) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Palantir Technologies:

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

0.067 = US$292m ÷ (US$5.2b - US$807m) (Based on the trailing twelve months to June 2024).

So, Palantir Technologies has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.6%.

Check out our latest analysis for Palantir Technologies

In the above chart we have measured Palantir Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Palantir Technologies .

What Does the ROCE Trend For Palantir Technologies Tell Us?

We're delighted to see that Palantir Technologies is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.7% on its capital. Not only that, but the company is utilizing 397% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Palantir Technologies has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Palantir Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Palantir Technologies' ROCE

To the delight of most shareholders, Palantir Technologies has now broken into profitability. And with a respectable 69% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.