Returns On Capital - An Important Metric For Perma-Fix Environmental Services (NASDAQ:PESI)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Perma-Fix Environmental Services (NASDAQ:PESI) 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-Fix Environmental Services, this is the formula:

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

0.088 = US$4.4m ÷ (US$79m - US$30m) (Based on the trailing twelve months to September 2020).

So, Perma-Fix Environmental Services has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 10%.

See our latest analysis for Perma-Fix Environmental Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Perma-Fix Environmental Services' ROCE against it's prior returns. If you'd like to look at how Perma-Fix Environmental Services has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Perma-Fix Environmental Services. The data shows that returns on capital have increased by 271% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Perma-Fix Environmental Services' ROCE

In a nutshell, we're pleased to see that Perma-Fix Environmental Services has been able to generate higher returns from less capital. And with a respectable 64% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Perma-Fix Environmental Services, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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