Profire Energy (NASDAQ:PFIE) Is Finding It Tricky To Allocate Its Capital
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Profire Energy (NASDAQ:PFIE) we aren't filled with optimism, but let's investigate further.
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. Analysts use this formula to calculate it for Profire Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$2.6m ÷ (US$51m - US$5.8m) (Based on the trailing twelve months to September 2022).
Thus, Profire Energy has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 8.2%.
See our latest analysis for Profire Energy
Above you can see how the current ROCE for Profire Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Profire Energy Tell Us?
We are a bit worried about the trend of returns on capital at Profire Energy. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Profire Energy to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Profire Energy is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Profire Energy does have some risks though, and we've spotted 1 warning sign for Profire Energy that you might be interested in.
While Profire Energy 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.
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