We Like These Underlying Trends At Pelikan International Corporation Berhad (KLSE:PELIKAN)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Pelikan International Corporation Berhad (KLSE:PELIKAN) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pelikan International Corporation Berhad, this is the formula:

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

0.044 = RM39m ÷ (RM1.4b - RM530m) (Based on the trailing twelve months to September 2020).

Therefore, Pelikan International Corporation Berhad has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 5.2%.

Check out 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 The Trend Of ROCE Can Tell Us

We're delighted to see that Pelikan International Corporation Berhad is reaping rewards from its investments and has now broken into profitability. The company now earns 4.4% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In Conclusion...

As discussed above, Pelikan International Corporation Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 63% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Pelikan International Corporation Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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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