Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Palfinger (VIE:PAL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Palfinger:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = €78m ÷ (€1.6b - €369m) (Based on the trailing twelve months to September 2020).
Therefore, Palfinger has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.5%.
See our latest analysis for Palfinger
Above you can see how the current ROCE for Palfinger 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 report for Palfinger.
How Are Returns Trending?
The returns on capital haven't changed much for Palfinger in recent years. The company has employed 30% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
In summary, Palfinger has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 28% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Palfinger, we've discovered 3 warning signs that you should be aware of.
While Palfinger 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. 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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About WBAG:PAL
Very undervalued with adequate balance sheet.
