Investors Will Want PGF Capital Berhad's (KLSE:PGF) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in PGF Capital Berhad's (KLSE:PGF) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for PGF Capital Berhad:

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

0.028 = RM6.6m ÷ (RM260m - RM22m) (Based on the trailing twelve months to May 2022).

Therefore, PGF Capital Berhad has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Building industry average of 7.8%.

View our latest analysis for PGF Capital Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for PGF Capital Berhad's ROCE against it's prior returns. If you're interested in investigating PGF Capital Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For PGF Capital Berhad Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at PGF Capital Berhad promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 305% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To sum it up, PGF Capital Berhad is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 213% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 3 warning signs we've spotted with PGF Capital Berhad (including 1 which doesn't sit too well with us) .

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.