Here's What's Concerning About PNC Process Systems' (SHSE:603690) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think PNC Process Systems (SHSE:603690) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for PNC Process Systems, this is the formula:

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

0.046 = CN¥340m ÷ (CN¥14b - CN¥6.3b) (Based on the trailing twelve months to September 2024).

Thus, PNC Process Systems has an ROCE of 4.6%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Check out our latest analysis for PNC Process Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for PNC Process Systems' ROCE against it's prior returns. If you're interested in investigating PNC Process Systems' past further, check out this free graph covering PNC Process Systems' past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at PNC Process Systems, we didn't gain much confidence. Around five years ago the returns on capital were 6.7%, but since then they've fallen to 4.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Another thing to note, PNC Process Systems has a high ratio of current liabilities to total assets of 46%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On PNC Process Systems' ROCE

Bringing it all together, while we're somewhat encouraged by PNC Process Systems' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 26% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about PNC Process Systems, we've spotted 4 warning signs, and 1 of them is concerning.

While PNC Process Systems 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.