When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Pan Malaysia Holdings Berhad (KLSE:PMHLDG), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Pan Malaysia Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = RM805k ÷ (RM51m - RM6.8m) (Based on the trailing twelve months to September 2022).
So, Pan Malaysia Holdings Berhad has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.7%.
See our latest analysis for Pan Malaysia 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 Pan Malaysia Holdings Berhad, check out these free graphs here.
How Are Returns Trending?
We are a bit anxious about the trends of ROCE at Pan Malaysia Holdings Berhad. The company used to generate 2.3% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 40% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
What We Can Learn From Pan Malaysia Holdings Berhad's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 52% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Pan Malaysia Holdings Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
While Pan Malaysia 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.
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