Returns On Capital At PermRock Royalty Trust (NYSE:PRT) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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. So after we looked into PermRock Royalty Trust (NYSE:PRT), the trends above didn't look too great.

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)

0.087 = US$7.4m ÷ (US$86m - US$850k) (Based on the trailing twelve months to December 2021).

Thus, PermRock Royalty Trust has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 10%.

See 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 past earnings, revenue and cash flow.

So How Is PermRock Royalty Trust's ROCE Trending?

There is reason to be cautious about PermRock Royalty Trust, given the returns are trending downwards. To be more specific, the ROCE was 17% three years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.

The Bottom Line

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. Investors must expect better things on the horizon though because the stock has risen 19% in the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing to note, we've identified 3 warning signs with PermRock Royalty Trust and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.