Capital Allocation Trends At Pekat Group Berhad (KLSE:PEKAT) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 investigating Pekat Group Berhad (KLSE:PEKAT), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Pekat Group Berhad:

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

0.10 = RM14m ÷ (RM178m - RM41m) (Based on the trailing twelve months to March 2023).

So, Pekat Group Berhad has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 4.9% generated by the Construction industry.

Check out our latest analysis for Pekat Group Berhad

Above you can see how the current ROCE for Pekat Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Pekat Group Berhad's ROCE Trend?

In terms of Pekat Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% 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.

On a related note, Pekat Group Berhad has decreased its current liabilities to 23% 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.

The Bottom Line On Pekat Group Berhad's ROCE

To conclude, we've found that Pekat Group Berhad is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 2.1% over the last year, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Pekat Group Berhad does have some risks though, and we've spotted 1 warning sign for Pekat Group Berhad that you might be interested in.

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. 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.