We Like These Underlying Return On Capital Trends At Perma-Pipe International Holdings (NASDAQ:PPIH)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Perma-Pipe International Holdings' (NASDAQ:PPIH) returns on capital, so let's have a look.
Understanding 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. The formula for this calculation on Perma-Pipe International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$11m ÷ (US$125m - US$47m) (Based on the trailing twelve months to April 2023).
Thus, Perma-Pipe International Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 11% it's much better.
Check out our latest analysis for Perma-Pipe International Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Perma-Pipe International Holdings' ROCE against it's prior returns. If you're interested in investigating Perma-Pipe International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Perma-Pipe International Holdings' ROCE Trending?
The fact that Perma-Pipe International Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 14% on its capital. Not only that, but the company is utilizing 22% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On Perma-Pipe International Holdings' ROCE
Overall, Perma-Pipe International Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a separate note, we've found 1 warning sign for Perma-Pipe International Holdings you'll probably want to know about.
While Perma-Pipe International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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