Investors Will Want PBA Holdings Bhd's (KLSE:PBA) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Speaking of which, we noticed some great changes in PBA Holdings Bhd's (KLSE:PBA) returns on capital, so let's have a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for PBA Holdings Bhd, this is the formula:

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

0.043 = RM56m ÷ (RM1.5b - RM208m) (Based on the trailing twelve months to September 2023).

Therefore, PBA Holdings Bhd has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 7.1%.

See our latest analysis for PBA Holdings Bhd

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

What Can We Tell From PBA Holdings Bhd's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at PBA Holdings Bhd promising. 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 41% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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...

As discussed above, PBA Holdings Bhd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 153% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if PBA Holdings Bhd can keep these trends up, it could have a bright future ahead.

If you'd like to know more about PBA Holdings Bhd, we've spotted 2 warning signs, and 1 of them is significant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.