We're Watching These Trends At PLB Engineering Berhad (KLSE:PLB)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think PLB Engineering Berhad (KLSE:PLB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for PLB Engineering Berhad:

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

0.021 = RM6.9m ÷ (RM544m - RM214m) (Based on the trailing twelve months to November 2020).

Therefore, PLB Engineering Berhad has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 4.9%.

Check out our latest analysis for PLB Engineering Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for PLB Engineering Berhad's ROCE against it's prior returns. If you'd like to look at how PLB Engineering Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For PLB Engineering Berhad Tell Us?

On the surface, the trend of ROCE at PLB Engineering Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 6.0% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for PLB Engineering Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 23% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with PLB Engineering Berhad (including 2 which shouldn't be ignored) .

While PLB Engineering 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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