PermRock Royalty Trust (NYSE:PRT) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at PermRock Royalty Trust (NYSE:PRT), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for PermRock Royalty Trust:

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

0.026 = US$2.3m ÷ (US$89m - US$181k) (Based on the trailing twelve months to December 2020).

So, PermRock Royalty Trust has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.4%.

Check out our latest analysis for PermRock Royalty Trust

In the above chart we have measured PermRock Royalty Trust's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PermRock Royalty Trust here for free.

So How Is PermRock Royalty Trust's ROCE Trending?

In terms of PermRock Royalty Trust's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% two 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 PermRock Royalty Trust becoming one if things continue as they have.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 50% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing PermRock Royalty Trust we've found 5 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While PermRock Royalty Trust may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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