The Trends At Pecca Group Berhad (KLSE:PECCA) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Pecca Group Berhad (KLSE:PECCA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Pecca Group Berhad is:

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

0.067 = RM11m ÷ (RM172m - RM11m) (Based on the trailing twelve months to June 2020).

So, Pecca Group Berhad has an ROCE of 6.7%. On its own, that's a low figure but it's around the 5.7% average generated by the Auto Components industry.

See our latest analysis for Pecca Group Berhad

In the above chart we have measured Pecca Group 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 report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Pecca Group Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.7% from 29% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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, Pecca Group Berhad has decreased its current liabilities to 6.4% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Pecca Group Berhad's ROCE

We're a bit apprehensive about Pecca Group Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 34% return to shareholders over the last three years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Pecca Group Berhad, we've discovered 4 warning signs that you should be aware of.

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This article by Simply Wall St is general in nature. 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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