What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, the ROCE of Perion Network (NASDAQ:PERI) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Perion Network, this is the formula:

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

0.11 = US$80m ÷ (US$937m - US$177m) (Based on the trailing twelve months to June 2024).

Thus, Perion Network has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Media industry average of 9.7%.

Check out our latest analysis for Perion Network

In the above chart we have measured Perion Network's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Perion Network for free.

What Does the ROCE Trend For Perion Network Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 290% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Perion Network's ROCE

To sum it up, Perion Network has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 35% over the last five years for shareholders who have owned the stock in this period. So to determine if Perion Network is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Perion Network does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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

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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.