Stock Analysis

Be Wary Of PPG Industries (NYSE:PPG) And Its Returns On Capital

  •  Updated
NYSE:PPG
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at PPG Industries (NYSE:PPG) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for PPG Industries:

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

0.12 = US$2.0b ÷ (US$22b - US$5.5b) (Based on the trailing twelve months to June 2021).

So, PPG Industries has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 10%.

Check out our latest analysis for PPG Industries

roce
NYSE:PPG Return on Capital Employed August 17th 2021

In the above chart we have measured PPG Industries' 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 PPG Industries here for free.

The Trend Of ROCE

In terms of PPG Industries' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On PPG Industries' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for PPG Industries. And the stock has followed suit returning a meaningful 75% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

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

While PPG Industries 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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