Returns Are Gaining Momentum At Parkson Holdings Berhad (KLSE:PARKSON)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Parkson Holdings Berhad's (KLSE:PARKSON) returns on capital, so let's have a look.

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)

0.027 = RM206m ÷ (RM11b - RM3.1b) (Based on the trailing twelve months to December 2020).

Thus, Parkson Holdings Berhad has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 5.6%.

See our latest analysis for Parkson Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkson Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Parkson Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Parkson Holdings Berhad's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Parkson Holdings Berhad promising. The figures show that over the last five years, ROCE has grown 1,143% 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.

The Bottom Line On Parkson Holdings Berhad's ROCE

To bring it all together, Parkson Holdings Berhad has done well to increase the returns it's generating from its capital employed. And since the stock has dived 76% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Parkson Holdings Berhad does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Parkson 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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