# P&F Industries Inc (NASDAQ:PFIN)’s Return on Capital

Buying P&F Industries makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in P&F Industries, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

### P&F Industries’s Return On Capital Employed

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine P&F Industries’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). PFIN’s ROCE is calculated below:

ROCE Calculation for PFIN

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$1.2m ÷ (US\$58m – US\$12m) = 2.9%

As you can see, PFIN earned \$2.9 from every \$100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which PFIN has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.

### A deeper look

The underperforming ROCE is not ideal for P&F Industries investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, PFIN’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that PFIN’s ROCE has deteriorated from 7.2%, indicating the company’s capital returns have declined. With this, the current earnings of US\$1.2m actually declined from US\$4.5m whilst capital employed also decreased but to a smaller extent, which means the company’s ROCE has deteriorated due to a decline in earnings relative to the capital invested in the business.

### Next Steps

P&F Industries’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like the management team and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate PFIN or move on to other alternatives.

1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for P&F Industries’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
2. Valuation: What is PFIN worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether PFIN is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.