PCCS Group Berhad's (KLSE:PCCS) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think PCCS Group Berhad (KLSE:PCCS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for PCCS Group Berhad:

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

0.10 = RM18m ÷ (RM309m - RM126m) (Based on the trailing twelve months to December 2024).

Thus, PCCS Group Berhad has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

See our latest analysis for PCCS Group Berhad

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

What The Trend Of ROCE Can Tell Us

Over the past five years, PCCS Group Berhad's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect PCCS Group Berhad to be a multi-bagger going forward.

On a separate but related note, it's important to know that PCCS Group Berhad has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, PCCS Group Berhad isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 3 warning signs with PCCS Group Berhad (at least 1 which is concerning) , and understanding them would certainly be useful.

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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.