Some Investors May Be Worried About HPP Holdings Berhad's (KLSE:HPPHB) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. 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.

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

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

0.022 = RM3.2m ÷ (RM159m - RM13m) (Based on the trailing twelve months to November 2024).

So, HPP Holdings Berhad has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Packaging industry average of 8.3%.

View our latest analysis for HPP Holdings Berhad

In the above chart we have measured HPP Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for HPP Holdings Berhad .

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

On the surface, the trend of ROCE at HPP Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 2.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From HPP Holdings Berhad's ROCE

In summary, we're somewhat concerned by HPP Holdings Berhad's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 3.1% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 2 warning signs for HPP Holdings Berhad that we think you should be aware of.

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.