HPMT Holdings Berhad (KLSE:HPMT) Will Will Want To Turn Around Its Return Trends

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at HPMT Holdings Berhad (KLSE:HPMT), it didn't seem to tick all of these boxes.

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. The formula for this calculation on HPMT Holdings Berhad is:

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

0.085 = RM13m ÷ (RM166m - RM15m) (Based on the trailing twelve months to March 2021).

So, HPMT Holdings Berhad has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.8%.

See our latest analysis for HPMT Holdings Berhad

In the above chart we have measured HPMT Holdings 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 HPMT Holdings Berhad.

The Trend Of ROCE

On the surface, the trend of ROCE at HPMT Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 8.5%. 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.

On a related note, HPMT Holdings Berhad has decreased its current liabilities to 8.9% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From HPMT Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by HPMT Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 76% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

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