Why The 29% Return On Capital At Powell Industries (NASDAQ:POWL) Should Have Your Attention

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. And in light of that, the trends we're seeing at Powell Industries' (NASDAQ:POWL) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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)

0.29 = US$117m ÷ (US$850m - US$442m) (Based on the trailing twelve months to March 2024).

Therefore, Powell Industries has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Electrical industry average of 13%.

See our latest analysis for Powell Industries

In the above chart we have measured Powell 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 analyst report for Powell Industries .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Powell Industries. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 34% more capital is being employed now too. So we're very much inspired by what we're seeing at Powell Industries thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 52% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

All in all, it's terrific to see that Powell Industries is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Powell Industries does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com