Stock Analysis

Returns On Capital At Porvair (LON:PRV) Paint An Interesting Picture

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LSE:PRV
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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, when we ran our eye over Porvair's (LON:PRV) trend of ROCE, we liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Porvair is:

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

0.11 = UK£16m ÷ (UK£176m - UK£34m) (Based on the trailing twelve months to May 2020).

Thus, Porvair has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Machinery industry.

Check out our latest analysis for Porvair

roce
LSE:PRV Return on Capital Employed January 6th 2021

In the above chart we have measured Porvair's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Porvair here for free.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 101% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

The main thing to remember is that Porvair has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 88% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in Porvair 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 solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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