Investors Could Be Concerned With Perusahaan Sadur Timah Malaysia (Perstima) Berhad's (KLSE:PERSTIM) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Perusahaan Sadur Timah Malaysia (Perstima) Berhad is:

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

0.11 = RM55m ÷ (RM543m - RM48m) (Based on the trailing twelve months to December 2020).

Thus, Perusahaan Sadur Timah Malaysia (Perstima) Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 5.4% it's much better.

Check out our latest analysis for Perusahaan Sadur Timah Malaysia (Perstima) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Perusahaan Sadur Timah Malaysia (Perstima) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Perusahaan Sadur Timah Malaysia (Perstima) Berhad, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Perusahaan Sadur Timah Malaysia (Perstima) Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 11%. 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 Perusahaan Sadur Timah Malaysia (Perstima) Berhad's ROCE

We're a bit apprehensive about Perusahaan Sadur Timah Malaysia (Perstima) Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Perusahaan Sadur Timah Malaysia (Perstima) Berhad (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Perusahaan Sadur Timah Malaysia (Perstima) 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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