Does Pintaras Jaya Berhad's (KLSE:PTARAS) Returns On Capital Reflect Well On The Business?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Pintaras Jaya Berhad (KLSE:PTARAS), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Pintaras Jaya Berhad, this is the formula:

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

0.11 = RM41m ÷ (RM529m - RM159m) (Based on the trailing twelve months to September 2020).

So, Pintaras Jaya Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Construction industry.

View our latest analysis for Pintaras Jaya Berhad

Above you can see how the current ROCE for Pintaras Jaya Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pintaras Jaya Berhad here for free.

How Are Returns Trending?

There is reason to be cautious about Pintaras Jaya Berhad, given the returns are trending downwards. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Pintaras Jaya Berhad becoming one if things continue as they have.

On a side note, Pintaras Jaya Berhad's current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 11%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Pintaras Jaya Berhad's ROCE

In summary, it's unfortunate that Pintaras Jaya Berhad is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Pintaras Jaya Berhad you'll probably want to know about.

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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