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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 PMB Technology Berhad (KLSE:PMBTECH), it didn’t seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 PMB Technology Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.048 = RM63m ÷ (RM2.0b – RM712m) (Based on the trailing twelve months to September 2023).
Therefore, PMB Technology Berhad has an ROCE of 4.8%. In absolute terms, that’s a low return but it’s around the Metals and Mining industry average of 6.0%.
See our latest analysis for PMB Technology Berhad
In the above chart we have measured PMB Technology Berhad’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 report for PMB Technology Berhad.
How Are Returns Trending?
There are better returns on capital out there than what we’re seeing at PMB Technology Berhad. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 197% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
Our Take On PMB Technology Berhad’s ROCE
In summary, PMB Technology Berhad has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 249% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
PMB Technology Berhad does have some risks, we noticed 3 warning signs (and 1 which can’t be ignored) we think you should know about.
While PMB Technology Berhad 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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