Yahoo Finance PWR Holdings (ASX:PWH) Might Become A Compounding Machine
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over PWR Holdings' (ASX:PWH) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on PWR Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = AU$34m ÷ (AU$123m - AU$18m) (Based on the trailing twelve months to December 2023).
Thus, PWR Holdings has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 12%.
Check out our latest analysis for PWR Holdings
Above you can see how the current ROCE for PWR Holdings 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 analyst report for PWR Holdings .
What The Trend Of ROCE Can Tell Us
We'd be pretty happy with returns on capital like PWR Holdings. Over the past five years, ROCE has remained relatively flat at around 32% and the business has deployed 120% more capital into its operations. Now considering ROCE is an attractive 32%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line
In summary, we're delighted to see that PWR Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 259% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for PWH that compares the share price and estimated value.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
