The Returns On Capital At Profire Energy (NASDAQ:PFIE) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Profire Energy (NASDAQ:PFIE), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.11 = US$5.2m ÷ (US$54m - US$6.8m) (Based on the trailing twelve months to December 2022).

So, Profire Energy has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.8% generated by the Energy Services industry.

Check out our latest analysis for Profire Energy

In the above chart we have measured Profire Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Profire Energy's ROCE Trend?

We are a bit worried about the trend of returns on capital at Profire Energy. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Profire Energy becoming one if things continue as they have.

What We Can Learn From Profire Energy's ROCE

In summary, it's unfortunate that Profire Energy is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 70% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Profire Energy you'll probably want to know about.

While Profire Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.