Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0800
    +0.0007 (+0.06%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • dólar/libra

    1.2637
    +0.0015 (+0.12%)
     
  • USD/JPY

    151.2090
    -0.1630 (-0.11%)
     
  • Bitcoin USD

    70,487.62
    -314.93 (-0.44%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,369.44
    +201.37 (+0.50%)
     

Should P&F Industries, Inc.’s (NASDAQ:PFIN) Weak Investment Returns Worry You?

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

Today we’ll evaluate P&F Industries, Inc. (NASDAQ:PFIN) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for P&F Industries:

0.029 = US$50k ÷ (US$58m – US$12m) (Based on the trailing twelve months to September 2018.)

Therefore, P&F Industries has an ROCE of 2.9%.

View our latest analysis for P&F Industries

Is P&F Industries’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, P&F Industries’s ROCE appears to be significantly below the 11% average in the Consumer Durables industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside P&F Industries’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

P&F Industries’s current ROCE of 2.9% is lower than its ROCE in the past, which was 7.2%, 3 years ago. So investors might consider if it has had issues recently.

NasdaqGM:PFIN Past Revenue and Net Income, February 25th 2019
NasdaqGM:PFIN Past Revenue and Net Income, February 25th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if P&F Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

P&F Industries’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

P&F Industries has total assets of US$58m and current liabilities of US$12m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From P&F Industries’s ROCE

P&F Industries has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better buy than P&F Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

Advertisement