Here's What To Make Of National Presto Industries' (NYSE:NPK) Decelerating Rates Of Return

By
Simply Wall St
Published
May 04, 2021
NYSE:NPK

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating National Presto Industries (NYSE:NPK), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on National Presto Industries is:

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

0.15 = US$56m ÷ (US$433m - US$55m) (Based on the trailing twelve months to December 2020).

So, National Presto Industries has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Aerospace & Defense industry.

Check out our latest analysis for National Presto Industries

roce
NYSE:NPK Return on Capital Employed May 5th 2021

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're interested in investigating National Presto Industries' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, National Presto Industries' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect National Presto Industries to be a multi-bagger going forward.

What We Can Learn From National Presto Industries' ROCE

In a nutshell, National Presto Industries has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for National Presto Industries you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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