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

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.068 = US$5.2m ÷ (US$76m - US$279k) (Based on the trailing twelve months to March 2024).

Therefore, PermRock Royalty Trust has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

View our latest analysis for PermRock Royalty Trust

Historical performance is a great place to start when researching a stock so above you can see the gauge for PermRock Royalty Trust's ROCE against it's prior returns. If you'd like to look at how PermRock Royalty Trust has performed in the past in other metrics, you can view this free graph of PermRock Royalty Trust's past earnings, revenue and cash flow.

What Does the ROCE Trend For PermRock Royalty Trust Tell Us?

We are a bit worried about the trend of returns on capital at PermRock Royalty Trust. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

Our Take On PermRock Royalty Trust's ROCE

In summary, it's unfortunate that PermRock Royalty Trust is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 18% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for PermRock Royalty Trust (of which 1 is a bit concerning!) that you should know about.

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. 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.