Pan Malaysia Holdings Berhad (KLSE:PMHLDG) Has Some Difficulty Using Its Capital Effectively

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Pan Malaysia Holdings Berhad (KLSE:PMHLDG), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Pan Malaysia Holdings Berhad, this is the formula:

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

0.018 = RM805k ÷ (RM51m - RM6.8m) (Based on the trailing twelve months to September 2022).

Therefore, Pan Malaysia Holdings Berhad has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.7%.

View our latest analysis for Pan Malaysia 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'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.

What Can We Tell From Pan Malaysia Holdings Berhad's ROCE Trend?

The trend of returns that Pan Malaysia Holdings Berhad is generating are raising some concerns. The company used to generate 2.3% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 40% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Pan Malaysia Holdings Berhad's ROCE

In summary, it's unfortunate that Pan Malaysia Holdings Berhad is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 53% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Pan Malaysia Holdings Berhad (1 can't be ignored) you should be aware of.

While Pan Malaysia 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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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.