PBA Holdings Bhd's (KLSE:PBA) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at PBA Holdings Bhd (KLSE:PBA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for PBA Holdings Bhd:

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

0.024 = RM29m ÷ (RM1.5b - RM216m) (Based on the trailing twelve months to December 2020).

Therefore, PBA Holdings Bhd has an ROCE of 2.4%. In absolute terms, that's a low return and it also 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 want to delve into the historical earnings, revenue and cash flow of PBA Holdings Bhd, check out these free graphs here.

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

In terms of PBA Holdings Bhd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.4% from 4.8% five years ago. However it looks like PBA Holdings Bhd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, PBA Holdings Bhd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 3 warning signs with PBA Holdings Bhd (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While PBA Holdings Bhd 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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