A Look Into Pfeiffer Vacuum Technology's (ETR:PFV) Impressive Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Pfeiffer Vacuum Technology's (ETR:PFV) trend of ROCE, we really 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 Pfeiffer Vacuum Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = €124m ÷ (€905m - €301m) (Based on the trailing twelve months to March 2023).
Thus, Pfeiffer Vacuum Technology has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 10%.
Check out our latest analysis for Pfeiffer Vacuum Technology
Above you can see how the current ROCE for Pfeiffer Vacuum Technology 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 Pfeiffer Vacuum Technology.
What Can We Tell From Pfeiffer Vacuum Technology's ROCE Trend?
In terms of Pfeiffer Vacuum Technology's history of ROCE, it's quite impressive. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 34% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than21% because total capital employed would be higher.The 21% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
The Bottom Line On Pfeiffer Vacuum Technology's ROCE
Pfeiffer Vacuum Technology has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 3.3% over the last five years for shareholders who have owned the stock in this period. So to determine if Pfeiffer Vacuum Technology is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
If you want to continue researching Pfeiffer Vacuum Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.
Pfeiffer Vacuum Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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