Protasco Berhad's (KLSE:PRTASCO) Returns On Capital Are Heading Higher

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Protasco Berhad's (KLSE:PRTASCO) returns on capital, so let's have a look.

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. The formula for this calculation on Protasco Berhad is:

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

0.094 = RM37m ÷ (RM853m - RM455m) (Based on the trailing twelve months to March 2024).

Thus, Protasco Berhad has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 7.7% generated by the Construction industry, it's much better.

Check out our latest analysis for Protasco Berhad

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that Protasco Berhad is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Protasco Berhad is using 27% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Protasco Berhad could be selling under-performing assets since the ROCE is improving.

On a side note, Protasco Berhad's current liabilities are still rather high at 53% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Protasco Berhad's ROCE

In the end, Protasco Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 11% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Protasco Berhad (of which 2 make us uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com