Returns On Capital At Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for Press Metal Aluminium Holdings Berhad:

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

0.10 = RM920m ÷ (RM12b - RM2.9b) (Based on the trailing twelve months to March 2021).

Thus, Press Metal Aluminium Holdings Berhad has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Metals and Mining industry.

View our latest analysis for Press Metal Aluminium Holdings Berhad

Above you can see how the current ROCE for Press Metal Aluminium Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Press Metal Aluminium Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 10%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a side note, Press Metal Aluminium Holdings Berhad has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Press Metal Aluminium Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Press Metal Aluminium Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 601% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Press Metal Aluminium Holdings Berhad that you might find interesting.

While Press Metal Aluminium Holdings Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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