Parkson Holdings Berhad (KLSE:PARKSON) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at Parkson Holdings Berhad (KLSE:PARKSON) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Parkson Holdings Berhad:

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

0.066 = RM399m ÷ (RM8.5b - RM2.4b) (Based on the trailing twelve months to September 2023).

Thus, Parkson Holdings Berhad has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Multiline Retail industry average of 5.9%.

Check out our latest analysis for Parkson Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Parkson Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Parkson Holdings Berhad's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 1,956% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Parkson Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 15% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Parkson Holdings Berhad and understanding this should be part of your investment process.

While Parkson 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.