Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Patrick Industries (NASDAQ:PATK), it didn't seem to tick all of these boxes.
Understanding 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. The formula for this calculation on Patrick Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$200m ÷ (US$1.8b - US$300m) (Based on the trailing twelve months to March 2021).
Therefore, Patrick Industries has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 12%.
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 to see what analysts are forecasting going forward, you should check out our free report for Patrick Industries.
What Can We Tell From Patrick Industries' ROCE Trend?
In terms of Patrick Industries' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Patrick Industries' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Patrick Industries is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 87% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Patrick Industries does have some risks though, and we've spotted 4 warning signs for Patrick Industries that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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