Stock Analysis

Some Investors May Be Worried About Park-Ohio Holdings' (NASDAQ:PKOH) Returns On Capital

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NasdaqGS:PKOH
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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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Park-Ohio Holdings (NASDAQ:PKOH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Park-Ohio Holdings, this is the formula:

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

0.02 = US$21m ÷ (US$1.4b - US$360m) (Based on the trailing twelve months to June 2022).

So, Park-Ohio Holdings has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

See our latest analysis for Park-Ohio Holdings

roce
NasdaqGS:PKOH Return on Capital Employed September 28th 2022

In the above chart we have measured Park-Ohio Holdings' 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 Park-Ohio Holdings here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Park-Ohio Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 2.0%. 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.

The Bottom Line On Park-Ohio Holdings' 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 Park-Ohio Holdings. But since the stock has dived 72% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we've found 2 warning signs for Park-Ohio Holdings that we think you should be aware of.

While Park-Ohio Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Park-Ohio Holdings?

Park-Ohio Holdings Corp. provides supply chain management outsourcing services, capital equipment, and manufactured components in the United States, Europe, Asia, Mexico, Canada, and internationally.

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Rewards

  • Trading at 76.4% below our estimate of its fair value

  • Earnings are forecast to grow 82.24% per year

Risks

  • Interest payments are not well covered by earnings

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About NasdaqGS:PKOH

Park-Ohio Holdings

Park-Ohio Holdings Corp. provides supply chain management outsourcing services, capital equipment, and manufactured components in the United States, Europe, Asia, Mexico, Canada, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth3
Past Performance0
Financial Health2
Dividends1

Read more about these checks in the individual report sections or in our analysis model.

Undervalued with moderate growth potential.