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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at PCCS Group Berhad (KLSE:PCCS) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 PCCS Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = RM9.0m ÷ (RM290m - RM103m) (Based on the trailing twelve months to September 2020).
Thus, PCCS Group Berhad has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.5%.
See our latest analysis for PCCS Group Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of PCCS Group Berhad, check out these free graphs here.
What Does the ROCE Trend For PCCS Group Berhad Tell Us?
The fact that PCCS Group Berhad is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.8% on its capital. In addition to that, PCCS Group Berhad is employing 61% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
What We Can Learn From PCCS Group Berhad's ROCE
Overall, PCCS Group Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 1.9% 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 with that in mind, we think the stock deserves further research.
On a separate note, we've found 2 warning signs for PCCS Group Berhad you'll probably want to know about.
While PCCS Group Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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About KLSE:PCCS
PCCS Group Berhad
An investment holding company, primarily manufactures, markets, and sells apparels in Malaysia, Cambodia, Hong Kong, Singapore, and the People’s Republic of China.
Adequate balance sheet slight.
