Will Poh Kong Holdings Berhad's (KLSE:POHKONG) Growth In ROCE Persist?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Poh Kong Holdings Berhad's (KLSE:POHKONG) returns on capital, so let's have a look.

What is 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 Poh Kong Holdings Berhad is:

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

0.084 = RM55m ÷ (RM808m - RM149m) (Based on the trailing twelve months to October 2020).

So, Poh Kong Holdings Berhad has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 6.8%.

See our latest analysis for Poh Kong Holdings 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 Poh Kong Holdings Berhad, check out these free graphs here.

What Can We Tell From Poh Kong Holdings Berhad's ROCE Trend?

Poh Kong Holdings Berhad has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 39% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Poh Kong Holdings Berhad's ROCE

In summary, we're delighted to see that Poh Kong Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 91% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Poh Kong Holdings Berhad you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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