Pestech International Berhad (KLSE:PESTECH) Is Reinvesting At Lower Rates Of Return

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Pestech International Berhad (KLSE:PESTECH), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 Pestech International Berhad:

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

0.073 = RM109m ÷ (RM2.7b - RM1.2b) (Based on the trailing twelve months to March 2021).

Thus, Pestech International Berhad has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

Check out our latest analysis for Pestech International Berhad

In the above chart we have measured Pestech International 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 Can We Tell From Pestech International Berhad's ROCE Trend?

When we looked at the ROCE trend at Pestech International Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 7.3%. However it looks like Pestech International Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Pestech International Berhad has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Pestech International Berhad's ROCE

To conclude, we've found that Pestech International Berhad is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Pestech International Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Pestech International 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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