When researching a stock for investment, what can tell us that the company is in decline? A business that’s potentially in decline often shows two trends, a return on capital employed (ROCE) that’s declining, and a base of capital employed that’s also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don’t look too good at PWO (ETR:PWO), so let’s see why.
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. The formula for this calculation on PWO is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.058 = €16m ÷ (€436m – €163m) (Based on the trailing twelve months to September 2024).
So, PWO has an ROCE of 5.8%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 8.8%.
Check out our latest analysis for PWO
In the above chart we have measured PWO’s 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 analyst report for PWO .
We are a bit worried about the trend of returns on capital at PWO. To be more specific, the ROCE was 8.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on PWO becoming one if things continue as they have.
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 41% return over the last five years, so investors appear very optimistic. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.
If you want to know some of the risks facing PWO we’ve found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
