Some Investors May Be Worried About P&F Industries' (NASDAQ:PFIN) Returns On Capital
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at P&F Industries (NASDAQ:PFIN), so let's see why.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for P&F Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0023 = US$106k ÷ (US$58m - US$11m) (Based on the trailing twelve months to June 2023).
Thus, P&F Industries has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.
View our latest analysis for P&F Industries
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how P&F Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is P&F Industries' ROCE Trending?
In terms of P&F Industries' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 1.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 P&F Industries to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that P&F Industries is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with P&F Industries (including 1 which makes us a bit uncomfortable) .
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.
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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.
