Stock Analysis

PWR Holdings (ASX:PWH) Is Reinvesting At Lower Rates Of Return

ASX:PWH
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So while PWR Holdings (ASX:PWH) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What is 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 PWR Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.25 = AU$17m ÷ (AU$83m - AU$13m) (Based on the trailing twelve months to December 2020).

Thus, PWR Holdings has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for PWR Holdings

roce
ASX:PWH Return on Capital Employed June 10th 2021

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, you can check out the forecasts from the analysts covering PWR Holdings here for free.

What Can We Tell From PWR Holdings' ROCE Trend?

When we looked at the ROCE trend at PWR Holdings, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 37%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From PWR Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by PWR Holdings' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 154% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in PWR Holdings it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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 ASX:PWH

PWR Holdings

Engages in the design, prototyping, production, testing, validation, and sale of cooling products and solutions in Australia, the United States, the United Kingdom, Italy, Germany, France, Japan, and internationally.

Flawless balance sheet with reasonable growth potential.