Capital Allocation Trends At Pentamaster Corporation Berhad (KLSE:PENTA) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Pentamaster Corporation Berhad (KLSE:PENTA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 1 warning sign about Pentamaster Corporation Berhad. View them for free.

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

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 Pentamaster Corporation Berhad is:

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

0.097 = RM106m ÷ (RM1.4b - RM257m) (Based on the trailing twelve months to December 2024).

Therefore, Pentamaster Corporation Berhad has an ROCE of 9.7%. On its own, that's a low figure but it's around the 8.2% average generated by the Machinery industry.

See our latest analysis for Pentamaster Corporation Berhad

In the above chart we have measured Pentamaster Corporation 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 analyst report for Pentamaster Corporation Berhad .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Pentamaster Corporation Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.7% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Pentamaster Corporation Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing, we've spotted 1 warning sign facing Pentamaster Corporation Berhad that you might find interesting.

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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.