Returns On Capital Are Showing Encouraging Signs 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Parkson Holdings Berhad's (KLSE:PARKSON) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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)

0.055 = RM340m ÷ (RM8.7b - RM2.5b) (Based on the trailing twelve months to June 2023).

Thus, Parkson Holdings Berhad has an ROCE of 5.5%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

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

What Does the ROCE Trend For Parkson Holdings Berhad Tell Us?

Parkson Holdings Berhad is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 9,786% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Parkson Holdings Berhad's ROCE

To sum it up, Parkson Holdings Berhad is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 18% 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.

Parkson Holdings Berhad does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) 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. 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.