Stock Analysis

PPG Industries' (NYSE:PPG) Returns On Capital Not Reflecting Well On The Business

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at PPG Industries (NYSE:PPG), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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)

0.10 = US$1.6b ÷ (US$21b - US$4.9b) (Based on the trailing twelve months to September 2022).

Therefore, PPG Industries has an ROCE of 10.0%. In absolute terms, that's a low return but it's around the Chemicals industry average of 12%.

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NYSE:PPG Return on Capital Employed December 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.

What Does the ROCE Trend For PPG Industries Tell Us?

On the surface, the trend of ROCE at PPG Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On PPG Industries' ROCE

To conclude, we've found that PPG Industries is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with PPG Industries (including 1 which makes us a bit uncomfortable) .

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.

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