Returns On Capital Are Showing Encouraging Signs At Parkson Holdings Berhad (KLSE:PARKSON)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Parkson Holdings Berhad, this is the formula:

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

0.042 = RM300m ÷ (RM9.9b - RM2.7b) (Based on the trailing twelve months to June 2021).

Thus, Parkson Holdings Berhad has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.5%.

See 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, revenue and cash flow of Parkson Holdings Berhad, check out these free graphs here.

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

Parkson Holdings Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 4.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Parkson Holdings Berhad has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line

To bring it all together, Parkson Holdings Berhad has done well to increase the returns it's generating from its capital employed. Given the stock has declined 66% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Parkson Holdings Berhad, we've spotted 3 warning signs, and 1 of them is significant.

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.