Pantech Group Holdings Berhad (KLSE:PANTECH) Is Reinvesting At Lower Rates Of Return

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Pantech Group Holdings Berhad (KLSE:PANTECH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Pantech Group Holdings Berhad, this is the formula:

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

0.049 = RM36m ÷ (RM907m - RM176m) (Based on the trailing twelve months to November 2020).

Therefore, Pantech Group Holdings Berhad has an ROCE of 4.9%. Even though it's in line with the industry average of 4.6%, it's still a low return by itself.

View our latest analysis for Pantech Group Holdings Berhad

Above you can see how the current ROCE for Pantech Group Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pantech Group Holdings Berhad here for free.

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

On the surface, the trend of ROCE at Pantech Group Holdings Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.9% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Pantech Group Holdings Berhad's ROCE

In summary, we're somewhat concerned by Pantech Group Holdings Berhad's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 16% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 3 warning signs for Pantech Group Holdings Berhad you'll probably want to know about.

While Pantech Group Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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