Returns On Capital Are Showing Encouraging Signs At Puncak Niaga Holdings Berhad (KLSE:PUNCAK)

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. So on that note, Puncak Niaga Holdings Berhad (KLSE:PUNCAK) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Puncak Niaga Holdings Berhad:

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

0.027 = RM67m ÷ (RM3.0b - RM466m) (Based on the trailing twelve months to June 2023).

So, Puncak Niaga Holdings Berhad has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 7.1%.

Check out our latest analysis for Puncak Niaga Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Puncak Niaga Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Puncak Niaga Holdings Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Puncak Niaga Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company now earns 2.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Puncak Niaga Holdings Berhad has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Puncak Niaga Holdings Berhad's ROCE

To sum it up, Puncak Niaga Holdings Berhad is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 17% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Puncak Niaga Holdings Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Puncak Niaga 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.