Investors Met With Slowing Returns on Capital At Pan Malaysia Holdings Berhad (KLSE:PMHLDG)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Pan Malaysia Holdings Berhad (KLSE:PMHLDG), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Pan Malaysia Holdings Berhad:

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

0.0068 = RM304k ÷ (RM52m - RM7.6m) (Based on the trailing twelve months to December 2021).

Therefore, Pan Malaysia Holdings Berhad has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.6%.

See our latest analysis for Pan Malaysia Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pan Malaysia Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Pan Malaysia Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 39% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 0.7%, it's hard to get excited about these developments.

The Bottom Line On Pan Malaysia Holdings Berhad's ROCE

It's a shame to see that Pan Malaysia Holdings Berhad is effectively shrinking in terms of its capital base. Since the stock has declined 69% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Pan Malaysia Holdings Berhad has the makings of a multi-bagger.

If you'd like to know more about Pan Malaysia Holdings Berhad, we've spotted 5 warning signs, and 2 of them are concerning.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.