Returns On Capital At Pestech International Berhad (KLSE:PESTECH) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Pestech International Berhad (KLSE:PESTECH) and its ROCE trend, we weren't exactly thrilled.

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 Pestech International Berhad is:

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

0.076 = RM107m ÷ (RM2.5b - RM1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Pestech International Berhad has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.0%.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Pestech International Berhad.

The Trend Of ROCE

On the surface, the trend of ROCE at Pestech International Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. 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.

On a separate but related note, it's important to know that Pestech International Berhad has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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 Key Takeaway

To conclude, we've found that Pestech International Berhad is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 45% in the last five years. Therefore based on the analysis done in this article, we don't think Pestech International Berhad has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Pestech International Berhad (of which 1 makes us a bit uncomfortable!) that you should know about.

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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