If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Poh Huat Resources Holdings Berhad (KLSE:POHUAT) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Poh Huat Resources Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = RM21m ÷ (RM621m - RM55m) (Based on the trailing twelve months to January 2024).
So, Poh Huat Resources Holdings Berhad has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.7%.
View our latest analysis for Poh Huat Resources Holdings Berhad
In the above chart we have measured Poh Huat Resources 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 Poh Huat Resources Holdings Berhad for free.
The Trend Of ROCE
When we looked at the ROCE trend at Poh Huat Resources Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.8% from 17% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Poh Huat Resources Holdings Berhad has done well to pay down its current liabilities to 8.9% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.