Stock Analysis

PPG Industries (NYSE:PPG) Might Be Having Difficulty Using Its Capital Effectively

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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at PPG Industries (NYSE:PPG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on PPG Industries is:

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

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

Therefore, PPG Industries has an ROCE of 9.6%. On its own, that's a low figure but it's around the 12% average generated by the Chemicals industry.

View our latest analysis for PPG Industries

roce
NYSE:PPG Return on Capital Employed June 1st 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at PPG Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From 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. In light of this, the stock has only gained 27% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

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

While PPG Industries 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.

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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