Profire Energy (NASDAQ:PFIE) Might Become A Compounding Machine

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. That's why when we briefly looked at Profire Energy's (NASDAQ:PFIE) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Profire Energy, this is the formula:

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

0.20 = US$11m ÷ (US$61m - US$7.4m) (Based on the trailing twelve months to June 2023).

So, Profire Energy has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 12%.

See our latest analysis for Profire Energy

Above you can see how the current ROCE for Profire Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Profire Energy here for free.

How Are Returns Trending?

We'd be pretty happy with returns on capital like Profire Energy. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 24% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Profire Energy can keep this up, we'd be very optimistic about its future.

Our Take On Profire Energy's ROCE

Profire Energy has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Yet over the last five years the stock has declined 18%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you want to know some of the risks facing Profire Energy we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

Profire Energy is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.