Investors Met With Slowing Returns on Capital At PermRock Royalty Trust (NYSE:PRT)
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at PermRock Royalty Trust (NYSE:PRT), it didn't seem to tick all of these boxes.
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 PermRock Royalty Trust, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$8.1m ÷ (US$80m - US$494k) (Based on the trailing twelve months to September 2023).
Thus, PermRock Royalty Trust has an ROCE of 10%. In isolation, that's a pretty standard return but against the Oil and Gas industry average of 16%, it's not as good.
Check out our latest analysis for PermRock Royalty Trust
Historical performance is a great place to start when researching a stock so above you can see the gauge for PermRock Royalty Trust's ROCE against it's prior returns. If you're interested in investigating PermRock Royalty Trust's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Things have been pretty stable at PermRock Royalty Trust, with its capital employed and returns on that capital staying somewhat the same for the last four years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if PermRock Royalty Trust doesn't end up being a multi-bagger in a few years time.
What We Can Learn From PermRock Royalty Trust's ROCE
In summary, PermRock Royalty Trust isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think PermRock Royalty Trust has the makings of a multi-bagger.
One final note, you should learn about the 3 warning signs we've spotted with PermRock Royalty Trust (including 1 which makes us a bit uncomfortable) .
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.
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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.
