Pelikan International Corporation Berhad (KLSE:PELIKAN) Will Be Looking To Turn Around Its Returns

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Pelikan International Corporation Berhad (KLSE:PELIKAN), we weren't too hopeful.

What is 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 Pelikan International Corporation Berhad:

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

0.044 = RM39m ÷ (RM1.3b - RM451m) (Based on the trailing twelve months to September 2021).

Therefore, Pelikan International Corporation Berhad has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.9%.

See our latest analysis for Pelikan International Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pelikan International Corporation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pelikan International Corporation Berhad, check out these free graphs here.

What Does the ROCE Trend For Pelikan International Corporation Berhad Tell Us?

There is reason to be cautious about Pelikan International Corporation Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Pelikan International Corporation Berhad to turn into a multi-bagger.

On a side note, Pelikan International Corporation Berhad has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Pelikan International Corporation Berhad's ROCE

In summary, it's unfortunate that Pelikan International Corporation Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Pelikan International Corporation Berhad we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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.