Yahoo Finance What These Trends Mean At PermRock Royalty Trust (NYSE:PRT)
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at PermRock Royalty Trust (NYSE:PRT), so let's see why.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on PermRock Royalty Trust is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = US$6.2m ÷ (US$89m - US$182k) (Based on the trailing twelve months to June 2020).
Therefore, PermRock Royalty Trust has an ROCE of 6.9%. On its own, that's a low figure but it's around the 5.8% average generated by the Oil and Gas industry.
Check out our latest analysis for PermRock Royalty Trust
Above you can see how the current ROCE for PermRock Royalty Trust 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 PermRock Royalty Trust.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at PermRock Royalty Trust. To be more specific, the ROCE was 14% one year ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect PermRock Royalty Trust to turn into a multi-bagger.
The Bottom Line On PermRock Royalty Trust's ROCE
In summary, it's unfortunate that PermRock Royalty Trust is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 71% during the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 4 warning signs for PermRock Royalty Trust (1 is significant) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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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