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What are the early trends we should look for to identify a stock that could 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. However, after briefly looking over the numbers, we don't think Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Press Metal Aluminium Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = RM2.0b ÷ (RM15b - RM3.3b) (Based on the trailing twelve months to September 2022).
Thus, Press Metal Aluminium Holdings Berhad has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Metals and Mining industry.
Check out our latest analysis for Press Metal Aluminium Holdings Berhad
In the above chart we have measured Press Metal Aluminium Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Press Metal Aluminium Holdings Berhad here for free.
How Are Returns Trending?
When we looked at the ROCE trend at Press Metal Aluminium Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 25% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Press Metal Aluminium Holdings Berhad has decreased its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.