Stock Analysis
- United States
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- Electrical
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- NasdaqGS:POWL
The Return Trends At Powell Industries (NASDAQ:POWL) Look Promising
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Powell Industries (NASDAQ:POWL) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Powell Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = US$13m ÷ (US$514m - US$204m) (Based on the trailing twelve months to December 2022).
Therefore, Powell Industries has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.
Check out our latest analysis for Powell Industries
Above you can see how the current ROCE for Powell Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Powell Industries.
What Can We Tell From Powell Industries' ROCE Trend?
Powell Industries has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 4.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Powell Industries has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line
As discussed above, Powell Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 75% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Powell Industries, we've spotted 2 warning signs, and 1 of them can't be ignored.
While Powell 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.
What are the risks and opportunities for Powell Industries?
Powell Industries, Inc., together with its subsidiaries, designs, develops, manufactures, sells, and services custom-engineered equipment and systems for the distribution, control, and monitoring of electrical energy.
Rewards
Trading at 40.9% below our estimate of its fair value
Became profitable this year
Risks
Earnings are forecast to decline by an average of 5.1% per year for the next 3 years
Further research on
Powell Industries
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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.
About NasdaqGS:POWL
Powell Industries
Powell Industries, Inc., together with its subsidiaries, designs, develops, manufactures, sells, and services custom-engineered equipment and systems for the distribution, control, and monitoring of electrical energy.
Flawless balance sheet with acceptable track record.
