If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Pesona Metro Holdings Berhad (KLSE:PESONA), it didn’t seem to tick all of these boxes.
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. To calculate this metric for Pesona Metro Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.091 = RM27m ÷ (RM654m – RM353m) (Based on the trailing twelve months to December 2023).
Therefore, Pesona Metro Holdings Berhad has an ROCE of 9.1%. In absolute terms, that’s a low return, but it’s much better than the Construction industry average of 6.6%.
Check out our latest analysis for Pesona Metro Holdings Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating Pesona Metro Holdings Berhad’s past further, check out this free graph covering Pesona Metro Holdings Berhad’s past earnings, revenue and cash flow.
The Trend Of ROCE
There hasn’t been much to report for Pesona Metro Holdings Berhad’s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So don’t be surprised if Pesona Metro Holdings Berhad doesn’t end up being a multi-bagger in a few years time.
Another thing to note, Pesona Metro Holdings Berhad has a high ratio of current liabilities to total assets of 54%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
We can conclude that in regards to Pesona Metro Holdings Berhad’s returns on capital employed and the trends, there isn’t much change to report on. And in the last five years, the stock has given away 11% so the market doesn’t look too hopeful on these trends strengthening any time soon. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
One final note, you should learn about the 4 warning signs we’ve spotted with Pesona Metro Holdings Berhad (including 2 which are a bit concerning) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
