Stock Analysis

PPG Industries (NYSE:PPG) May Have Issues Allocating Its Capital

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NYSE:PPG
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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.

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 PPG Industries:

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

0.095 = US$1.6b ÷ (US$22b - US$5.2b) (Based on the trailing twelve months to June 2022).

Thus, PPG Industries has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

See our latest analysis for PPG Industries

roce
NYSE:PPG Return on Capital Employed September 1st 2022

Above you can see how the current ROCE for PPG Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From PPG Industries' ROCE Trend?

When we looked at the ROCE trend at PPG Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 16% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

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. In light of this, the stock has only gained 33% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 3 warning signs we've spotted with PPG Industries (including 1 which makes us a bit uncomfortable) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

What are the risks and opportunities for PPG Industries?

PPG Industries, Inc. manufactures and distributes paints, coatings, and specialty materials worldwide.

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Rewards

  • Trading at 5.6% below our estimate of its fair value

  • Earnings are forecast to grow 15.37% per year

Risks

  • Debt is not well covered by operating cash flow

  • Profit margins (5.8%) are lower than last year (8.5%)

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