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. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Panasonic Manufacturing Malaysia Berhad (KLSE:PANAMY) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Panasonic Manufacturing Malaysia Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = RM73m ÷ (RM916m - RM118m) (Based on the trailing twelve months to December 2022).
Therefore, Panasonic Manufacturing Malaysia Berhad has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 11%.
View our latest analysis for Panasonic Manufacturing Malaysia Berhad
Above you can see how the current ROCE for Panasonic Manufacturing Malaysia Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Panasonic Manufacturing Malaysia Berhad's ROCE Trend?
We are a bit worried about the trend of returns on capital at Panasonic Manufacturing Malaysia Berhad. Unfortunately the returns on capital have diminished from the 13% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Panasonic Manufacturing Malaysia Berhad becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Panasonic Manufacturing Malaysia Berhad is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 15% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.