There Are Reasons To Feel Uneasy About Poh Huat Resources Holdings Berhad's (KLSE:POHUAT) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Poh Huat Resources Holdings Berhad (KLSE:POHUAT) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Poh Huat Resources Holdings Berhad, this is the formula:

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

0.14 = RM63m ÷ (RM574m - RM121m) (Based on the trailing twelve months to January 2021).

So, Poh Huat Resources Holdings Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Durables industry.

View our latest analysis for Poh Huat Resources Holdings Berhad

Above you can see how the current ROCE for Poh Huat Resources Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Poh Huat Resources Holdings Berhad.

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

In terms of Poh Huat Resources Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 14%. 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, Poh Huat Resources Holdings Berhad has decreased its current liabilities to 21% 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. 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 Poh Huat Resources Holdings Berhad's ROCE

In summary, Poh Huat Resources 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 39% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Poh Huat Resources Holdings Berhad, we've discovered 2 warning signs that you should be aware of.

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