PGF Capital Berhad (KLSE:PGF) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, PGF Capital Berhad (KLSE:PGF) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for PGF Capital Berhad, this is the formula:

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

0.098 = RM25m ÷ (RM289m - RM34m) (Based on the trailing twelve months to February 2023).

So, PGF Capital Berhad has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Building industry average of 7.1%.

Check out 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'd like to look at how PGF Capital Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for PGF Capital Berhad

The Trend Of ROCE

PGF Capital Berhad has not disappointed with their ROCE growth. 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 381% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On PGF Capital Berhad's ROCE

As discussed above, PGF Capital Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 200% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if PGF Capital Berhad can keep these trends up, it could have a bright future ahead.

Like most companies, PGF Capital Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

While PGF Capital 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. 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.