Returns On Capital Are Showing Encouraging Signs At Perma-Pipe International Holdings (NASDAQ:PPIH)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Perma-Pipe International Holdings (NASDAQ:PPIH) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Perma-Pipe International Holdings, this is the formula:

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

0.19 = US$20m ÷ (US$159m - US$56m) (Based on the trailing twelve months to July 2024).

So, Perma-Pipe International Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Machinery industry.

Check out our latest analysis for Perma-Pipe International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Perma-Pipe International Holdings.

What Can We Tell From Perma-Pipe International Holdings' ROCE Trend?

We like the trends that we're seeing from Perma-Pipe International Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The amount of capital employed has increased too, by 30%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Perma-Pipe International Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Perma-Pipe International Holdings has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 70% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for PPIH that compares the share price and estimated value.

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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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.