National Presto Industries (NYSE:NPK) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into National Presto Industries (NYSE:NPK), the trends above didn't look too great.

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

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)

0.068 = US$24m ÷ (US$407m - US$52m) (Based on the trailing twelve months to October 2022).

Thus, National Presto Industries has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.4%.

View our latest analysis for National Presto Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for National Presto Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of National Presto Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of National Presto Industries' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on National Presto Industries becoming one if things continue as they have.

The Bottom Line On National Presto Industries' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

National Presto Industries does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While National Presto 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.

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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.