Here's What's Concerning About Patrick Industries' (NASDAQ:PATK) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Patrick Industries (NASDAQ:PATK) 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?

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 Patrick Industries is:

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

0.11 = US$171m ÷ (US$1.8b - US$227m) (Based on the trailing twelve months to December 2020).

Thus, Patrick Industries has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 9.3% it's much better.

Check out our latest analysis for Patrick Industries

In the above chart we have measured Patrick Industries' 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 Patrick Industries here for free.

What Can We Tell From Patrick Industries' ROCE Trend?

On the surface, the trend of ROCE at Patrick Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 22% five years ago. However it looks like Patrick Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

In summary, Patrick Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 184% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Patrick Industries we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Patrick Industries 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. 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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