Capital Allocation Trends At HPMT Holdings Berhad (KLSE:HPMT) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating HPMT Holdings Berhad (KLSE:HPMT), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for HPMT Holdings Berhad, this is the formula:

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

0.11 = RM17m ÷ (RM181m - RM27m) (Based on the trailing twelve months to March 2022).

So, HPMT Holdings Berhad has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 12%.

See our latest analysis for HPMT Holdings Berhad

Above you can see how the current ROCE for HPMT Holdings Berhad 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 HPMT Holdings Berhad here for free.

How Are Returns Trending?

When we looked at the ROCE trend at HPMT Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On HPMT Holdings Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HPMT Holdings Berhad is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a separate note, we've found 2 warning signs for HPMT Holdings Berhad you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.