Here's What's Concerning About PPB Group Berhad's (KLSE:PPB) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within PPB Group Berhad (KLSE:PPB), we weren't too hopeful.

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. The formula for this calculation on PPB Group Berhad is:

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

0.00007 = RM1.8m ÷ (RM27b - RM1.7b) (Based on the trailing twelve months to December 2021).

Therefore, PPB Group Berhad has an ROCE of 0.007%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10%.

Check out our latest analysis for PPB Group Berhad

In the above chart we have measured PPB Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PPB Group Berhad here for free.

So How Is PPB Group Berhad's ROCE Trending?

There is reason to be cautious about PPB Group Berhad, given the returns are trending downwards. About five years ago, returns on capital were 1.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on PPB Group Berhad becoming one if things continue as they have.

Our Take On PPB Group Berhad's ROCE

In summary, it's unfortunate that PPB Group Berhad is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 29% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

PPB Group Berhad does have some risks though, and we've spotted 1 warning sign for PPB Group Berhad that you might be interested in.

While PPB Group 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.