NPC Resources Berhad (KLSE:NPC) Is Reinvesting At Lower Rates Of Return

By
Simply Wall St
Published
June 06, 2021
KLSE:NPC
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at NPC Resources Berhad (KLSE:NPC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for NPC Resources Berhad, this is the formula:

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

0.0079 = RM7.3m ÷ (RM1.3b - RM418m) (Based on the trailing twelve months to December 2020).

Thus, NPC Resources Berhad has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

See our latest analysis for NPC Resources Berhad

roce
KLSE:NPC Return on Capital Employed June 7th 2021

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 NPC Resources Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of NPC Resources Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.8% from 2.1% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On NPC Resources Berhad's ROCE

While returns have fallen for NPC Resources Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 16% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about NPC Resources Berhad, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While NPC Resources 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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