Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at P.A. Resources Berhad (KLSE:PA) so let's look a bit deeper.
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 P.A. Resources Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = RM13m ÷ (RM151m - RM21m) (Based on the trailing twelve months to September 2020).
Therefore, P.A. Resources Berhad has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 2.9% generated by the Metals and Mining industry, it's much better.
See our latest analysis for P.A. Resources Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for P.A. Resources Berhad's ROCE against it's prior returns. If you're interested in investigating P.A. Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For P.A. Resources Berhad Tell Us?
P.A. Resources Berhad has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 10.0% on its capital. In addition to that, P.A. Resources Berhad is employing 44% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, P.A. Resources Berhad has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.What We Can Learn From P.A. Resources Berhad's ROCE
In summary, it's great to see that P.A. Resources Berhad has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 244% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if P.A. Resources Berhad can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 2 warning signs for P.A. Resources Berhad you'll probably want to 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. 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.
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About KLSE:PA
P.A. Resources Berhad
An investment holding company, provides aluminum extrusion, fabrication, and related services primarily in Malaysia and the United States.
Flawless balance sheet with solid track record.
