If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Parkson Holdings Berhad (KLSE:PARKSON) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Parkson Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = RM267m ÷ (RM9.5b - RM3.7b) (Based on the trailing twelve months to December 2021).
Therefore, Parkson Holdings Berhad has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.
See our latest analysis for Parkson Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkson Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Parkson Holdings Berhad, check out these free graphs here.
How Are Returns Trending?
Parkson Holdings Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.6%, which is always encouraging. While returns have increased, the amount of capital employed by Parkson Holdings Berhad has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
In Conclusion...
In summary, we're delighted to see that Parkson Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 80% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.