To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Pensonic Holdings Berhad (KLSE:PENSONI), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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)
0.035 = RM5.9m ÷ (RM263m - RM98m) (Based on the trailing twelve months to February 2021).
Thus, Pensonic Holdings Berhad has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.9%.
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're interested in investigating Pensonic Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Pensonic Holdings Berhad's ROCE Trend?
On the surface, the trend of ROCE at Pensonic Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 3.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
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. 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.
The Bottom Line
In summary, Pensonic Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 25% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to know some of the risks facing Pensonic Holdings Berhad we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.
While Pensonic Holdings 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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