# What Should You Know About P&F Industries Inc’s (NASDAQ:PFIN) Capital Returns?

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in P&F Industries Inc (NASDAQ:PFIN).

Purchasing P&F Industries gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. 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).

### Calculating Return On Capital Employed for PFIN

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at P&F Industries’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated P&F Industries’s ROCE for you below:

ROCE Calculation for PFIN

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

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$471.00k ÷ (US\$57.05m – US\$10.46m) = 1.01%

As you can see, PFIN earned \$1 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.

### Then why have investors invested?

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. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that PFIN weakened investor return on capital employed from 8.06%. In this time, earnings have fallen from US\$4.16m to US\$471.00k and 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

PFIN’s investors have experienced a downward trend in ROCE and it 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. P&F Industries’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

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.