Returns On Capital At Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) Have Stalled

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Press Metal Aluminium Holdings Berhad's (KLSE:PMETAL) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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 Press Metal Aluminium Holdings Berhad, this is the formula:

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

0.14 = RM1.7b ÷ (RM15b - RM2.5b) (Based on the trailing twelve months to June 2023).

Therefore, Press Metal Aluminium Holdings Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Metals and Mining industry.

Check out 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'd like, you can check out the forecasts from the analysts covering Press Metal Aluminium Holdings Berhad here for free.

So How Is Press Metal Aluminium Holdings Berhad's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 102% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Press Metal Aluminium Holdings Berhad's ROCE

The main thing to remember is that Press Metal Aluminium Holdings Berhad has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 111% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Press Metal Aluminium Holdings Berhad, we've discovered 1 warning sign that you should be aware of.

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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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.