Stock Analysis

The Returns On Capital At Parsons (NYSE:PSN) Don't Inspire Confidence

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NYSE:PSN
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Parsons (NYSE:PSN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Parsons is:

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

0.044 = US$132m ÷ (US$4.1b - US$1.1b) (Based on the trailing twelve months to June 2022).

Therefore, Parsons has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 8.8%.

Check out our latest analysis for Parsons

roce
NYSE:PSN Return on Capital Employed September 1st 2022

In the above chart we have measured Parsons' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Parsons here for free.

How Are Returns Trending?

In terms of Parsons' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 9.9%, but since then they've fallen to 4.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Parsons has decreased its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Parsons' ROCE

To conclude, we've found that Parsons is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 24% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Parsons could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Parsons is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NYSE:PSN

Parsons

Parsons Corporation provides integrated solutions and services in the defense, intelligence, and critical infrastructure markets in North America, the Middle East, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth3
Past Performance4
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet with proven track record.