Yahoo Finance Returns Are Gaining Momentum At Perma-Pipe International Holdings (NASDAQ:PPIH)
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Perma-Pipe International Holdings' (NASDAQ:PPIH) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Perma-Pipe International Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$2.2m ÷ (US$122m - US$37m) (Based on the trailing twelve months to October 2021).
Therefore, Perma-Pipe International Holdings has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.
See 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 want to delve into the historical earnings, revenue and cash flow of Perma-Pipe International Holdings, check out these free graphs here.
What Does the ROCE Trend For Perma-Pipe International Holdings Tell Us?
We're delighted to see that Perma-Pipe International Holdings is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.5% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line
In summary, we're delighted to see that Perma-Pipe International Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know about the risks facing Perma-Pipe International Holdings, we've discovered 1 warning sign that you should be aware of.
While Perma-Pipe International 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.
