PNE Industries' (SGX:BDA) Returns On Capital Not Reflecting Well On The Business

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within PNE Industries (SGX:BDA), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for PNE Industries, this is the formula:

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

0.028 = S$2.2m ÷ (S$93m - S$16m) (Based on the trailing twelve months to March 2022).

So, PNE Industries has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.0%.

Our analysis indicates that BDA is potentially overvalued!

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating PNE Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For PNE Industries Tell Us?

We are a bit worried about the trend of returns on capital at PNE Industries. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect PNE Industries to turn into a multi-bagger.

Our Take On PNE Industries' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 4.4% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

PNE Industries does come with some risks though, we found 6 warning signs in our investment analysis, and 3 of those make us uncomfortable...

While PNE Industries 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. 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.