What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Box-Pak (Malaysia) Bhd (KLSE:BOXPAK) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Box-Pak (Malaysia) Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = RM9.0m ÷ (RM540m - RM319m) (Based on the trailing twelve months to December 2022).
Therefore, Box-Pak (Malaysia) Bhd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 12%.
Check out our latest analysis for Box-Pak (Malaysia) Bhd
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'd like to look at how Box-Pak (Malaysia) Bhd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Box-Pak (Malaysia) Bhd's ROCE Trend?
It's great to see that Box-Pak (Malaysia) Bhd has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.1% on their capital employed. Additionally, the business is utilizing 30% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 59% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.