Returns On Capital Signal Tricky Times Ahead For HPP Holdings Berhad (KLSE:HPPHB)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think HPP Holdings Berhad (KLSE:HPPHB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on HPP Holdings Berhad is:

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

0.10 = RM13m ÷ (RM151m - RM20m) (Based on the trailing twelve months to November 2021).

So, HPP Holdings Berhad has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Packaging industry.

Check out our latest analysis for HPP Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for HPP Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating HPP Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For HPP Holdings Berhad Tell Us?

In terms of HPP Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 10% from 24% three years ago. However it looks like HPP Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On HPP Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by HPP Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 15% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

HPP Holdings Berhad does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.