PermRock Royalty Trust (NYSE:PRT) May Have Issues Allocating Its Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into PermRock Royalty Trust (NYSE:PRT), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for PermRock Royalty Trust, this is the formula:

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

0.068 = US$5.2m ÷ (US$76m - US$279k) (Based on the trailing twelve months to March 2024).

Therefore, PermRock Royalty Trust has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.

Check out our latest analysis for PermRock Royalty Trust

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for PermRock Royalty Trust's ROCE against it's prior returns. If you're interested in investigating PermRock Royalty Trust's past further, check out this free graph covering PermRock Royalty Trust's past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at PermRock Royalty Trust. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect PermRock Royalty Trust to turn into a multi-bagger.

Our Take On PermRock Royalty Trust's ROCE

In summary, it's unfortunate that PermRock Royalty Trust is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

PermRock Royalty Trust does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While PermRock Royalty Trust 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com