There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) 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?
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. The formula for this calculation on Press Metal Aluminium Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = RM1.7b ÷ (RM15b – RM2.2b) (Based on the trailing twelve months to December 2023).
Therefore, Press Metal Aluminium Holdings Berhad has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 6.0% generated by the Metals and Mining industry.
View our latest analysis for Press Metal Aluminium Holdings Berhad
In the above chart we have measured Press Metal Aluminium Holdings Berhad’s 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 analyst report for Press Metal Aluminium Holdings Berhad .
How Are Returns Trending?
On the surface, the trend of ROCE at Press Metal Aluminium Holdings Berhad doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 13% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.
On a related note, Press Metal Aluminium Holdings Berhad has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Press Metal Aluminium Holdings Berhad’s ROCE
In summary, we’re somewhat concerned by Press Metal Aluminium Holdings Berhad’s diminishing returns on increasing amounts of capital. The market must be rosy on the stock’s future because even though the underlying trends aren’t too encouraging, the stock has soared 145%. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.
On a separate note, we’ve found 1 warning sign for Press Metal Aluminium Holdings Berhad you’ll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
