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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. 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)

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. The formula for this calculation on Parkson Holdings Berhad is:

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

0.11 = RM511m ÷ (RM8.5b - RM3.9b) (Based on the trailing twelve months to March 2024).

Thus, Parkson Holdings Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Multiline Retail industry average of 6.5% it's much better.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Parkson Holdings Berhad.

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

We're pretty happy with how the ROCE has been trending at Parkson Holdings Berhad. We found that the returns on capital employed over the last five years have risen by 2,009%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 27% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Parkson Holdings Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In the end, Parkson Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 14% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 2 warning signs for Parkson Holdings Berhad that we think you should be aware of.

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. 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.

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