Stock Analysis

PNE (ETR:PNE3) Might Be Having Difficulty Using Its Capital Effectively

XTRA:PNE3
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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after investigating PNE (ETR:PNE3), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on PNE is:

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

0.016 = €12m ÷ (€895m - €124m) (Based on the trailing twelve months to September 2022).

Thus, PNE has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.

View our latest analysis for PNE

roce
XTRA:PNE3 Return on Capital Employed February 21st 2023

In the above chart we have measured PNE's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PNE.

What Does the ROCE Trend For PNE Tell Us?

In terms of PNE's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 37%, but since then they've fallen to 1.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, PNE has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On PNE's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for PNE. And long term investors must be optimistic going forward because the stock has returned a huge 496% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 1 warning sign for PNE that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether PNE is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.