How Has Pensonic Holdings Berhad (KLSE:PENSONI) Allocated Its Capital?

When researching a stock for investment, what can tell us that the company is in decline? 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. And from a first read, things don't look too good at Pensonic Holdings Berhad (KLSE:PENSONI), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Pensonic Holdings Berhad is:

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

0.0015 = RM247k ÷ (RM252m - RM93m) (Based on the trailing twelve months to August 2020).

So, Pensonic Holdings Berhad has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

Check out our latest analysis for Pensonic Holdings Berhad

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Pensonic Holdings Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.9% 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. 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 Pensonic Holdings Berhad becoming one if things continue as they have.

On a related note, Pensonic Holdings Berhad has decreased its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Pensonic Holdings Berhad's ROCE

In summary, it's unfortunate that Pensonic Holdings Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Pensonic Holdings Berhad, we've spotted 5 warning signs, and 2 of them make us uncomfortable.

While Pensonic Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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