The Trends At Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) That You Should Know About

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.086 = RM780m ÷ (RM11b - RM2.4b) (Based on the trailing twelve months to December 2020).

So, Press Metal Aluminium Holdings Berhad has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 4.6% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Press Metal Aluminium Holdings Berhad

In the above chart we have measured Press Metal Aluminium Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Press Metal Aluminium Holdings Berhad.

What Does the ROCE Trend For Press Metal Aluminium Holdings Berhad Tell Us?

In terms of Press Metal Aluminium Holdings Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. 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.

On a related note, Press Metal Aluminium Holdings Berhad has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

We're a bit apprehensive about Press Metal Aluminium Holdings Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 1,041% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing Press Metal Aluminium Holdings Berhad that you might find interesting.

While Press Metal Aluminium 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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