Park-Ohio Holdings (NASDAQ:PKOH) May Have Issues Allocating Its Capital
There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Park-Ohio Holdings (NASDAQ:PKOH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for Park-Ohio Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = US$12m ÷ (US$1.4b - US$349m) (Based on the trailing twelve months to December 2021).
Therefore, Park-Ohio Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.
View our latest analysis for Park-Ohio Holdings
Above you can see how the current ROCE for Park-Ohio Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Park-Ohio Holdings' ROCE Trend?
On the surface, the trend of ROCE at Park-Ohio Holdings doesn't inspire confidence. Around five years ago the returns on capital were 10.0%, but since then they've fallen to 1.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Park-Ohio Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 64% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we found 4 warning signs for Park-Ohio Holdings (2 are significant) you should be aware of.
While Park-Ohio Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
