Stock Analysis

Here's What's Concerning About PPG Industries' (NYSE:PPG) 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think PPG Industries (NYSE:PPG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for PPG Industries, this is the formula:

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

0.11 = US$1.8b ÷ (US$21b - US$4.8b) (Based on the trailing twelve months to December 2021).

Thus, PPG Industries has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for PPG Industries

roce
NYSE:PPG Return on Capital Employed February 24th 2022

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 to see what analysts are forecasting going forward, you should check out our free report for PPG Industries.

How Are Returns Trending?

On the surface, the trend of ROCE at PPG Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On PPG Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that PPG Industries is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 49% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, PPG Industries does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether PPG Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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