Here's What To Make Of Pacific Millennium Packaging Group's (HKG:1820) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Pacific Millennium Packaging Group's (HKG:1820) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for Pacific Millennium Packaging Group:

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

0.17 = CN¥143m ÷ (CN¥1.5b - CN¥707m) (Based on the trailing twelve months to June 2020).

So, Pacific Millennium Packaging Group has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 11% it's much better.

Check out our latest analysis for Pacific Millennium Packaging Group

Above you can see how the current ROCE for Pacific Millennium Packaging Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pacific Millennium Packaging Group here for free.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 17% for the last four years, and the capital employed within the business has risen 109% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 46% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Key Takeaway

In the end, Pacific Millennium Packaging Group has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 32% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Pacific Millennium Packaging Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Pacific Millennium Packaging Group 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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