Yahoo Finance Investors Met With Slowing Returns on Capital At Porvair (LON:PRV)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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, the ROCE of Porvair (LON:PRV) looks decent, right now, so lets see what the trend of returns can tell us.
What Is 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 Porvair, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = UK£16m ÷ (UK£181m - UK£36m) (Based on the trailing twelve months to May 2022).
Therefore, Porvair has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
See our latest analysis for Porvair
Above you can see how the current ROCE for Porvair 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 Porvair.
So How Is Porvair's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 41% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Porvair has consistently earned this amount. 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.
The Bottom Line On Porvair's ROCE
The main thing to remember is that Porvair has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 22% return to shareholders who held over that period. So to determine if Porvair is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
While Porvair doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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