Our Take On The Returns On Capital At HPMT Holdings Berhad (KLSE:HPMT)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think HPMT Holdings Berhad (KLSE:HPMT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 HPMT Holdings Berhad is:

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

0.06 = RM8.9m ÷ (RM165m - RM18m) (Based on the trailing twelve months to September 2020).

Thus, HPMT Holdings Berhad has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at HPMT Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, HPMT Holdings Berhad has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line On HPMT Holdings Berhad's ROCE

In summary, we're somewhat concerned by HPMT Holdings Berhad's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

HPMT Holdings Berhad does have some risks though, and we've spotted 2 warning signs for HPMT Holdings Berhad that you might be interested in.

While HPMT Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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