In This Article:
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at PEC (SGX:IX2), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on PEC is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = S$13m ÷ (S$432m - S$149m) (Based on the trailing twelve months to December 2023).
Thus, PEC has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.6%.
View our latest analysis for PEC
Historical performance is a great place to start when researching a stock so above you can see the gauge for PEC's ROCE against it's prior returns. If you're interested in investigating PEC's past further, check out this free graph covering PEC's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of PEC's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on PEC becoming one if things continue as they have.
Our Take On PEC's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 6.3% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.