Is Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) Likely To Turn Things Around?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Harrisons Holdings (Malaysia) Berhad, this is the formula:

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

0.096 = RM39m ÷ (RM772m - RM365m) (Based on the trailing twelve months to June 2020).

So, Harrisons Holdings (Malaysia) Berhad has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 7.3% generated by the Trade Distributors industry, it's much better.

See our latest analysis for Harrisons Holdings (Malaysia) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Harrisons Holdings (Malaysia) Berhad's ROCE against it's prior returns. If you're interested in investigating Harrisons Holdings (Malaysia) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Harrisons Holdings (Malaysia) Berhad Tell Us?

When we looked at the ROCE trend at Harrisons Holdings (Malaysia) Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Harrisons Holdings (Malaysia) Berhad has a high ratio of current liabilities to total assets of 47%. 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.

Our Take On Harrisons Holdings (Malaysia) Berhad's ROCE

In summary, Harrisons Holdings (Malaysia) Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 3 warning signs for Harrisons Holdings (Malaysia) Berhad that we think you should be aware of.

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. 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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