Here's What Profire Energy's (NASDAQ:PFIE) Strong Returns On Capital Mean
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Profire Energy (NASDAQ:PFIE), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Profire Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$11m ÷ (US$61m - US$5.7m) (Based on the trailing twelve months to September 2023).
So, Profire Energy has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
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'd like to see what analysts are forecasting going forward, you should check out our free report for Profire Energy.
What Can We Tell From Profire Energy's ROCE Trend?
In terms of Profire Energy's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 23% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Profire Energy can keep this up, we'd be very optimistic about its future.
The Bottom Line On Profire Energy's ROCE
In summary, we're delighted to see that Profire Energy has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock has only delivered a 12% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
If you want to know some of the risks facing Profire Energy we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.
