If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at Pensonic Holdings Berhad (KLSE:PENSONI), it didn't seem to tick all of these boxes.
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 Pensonic Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = RM4.5m ÷ (RM294m - RM120m) (Based on the trailing twelve months to August 2022).
So, Pensonic Holdings Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.
Check out our latest analysis for Pensonic Holdings Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Pensonic Holdings Berhad, check out these free graphs here.
So How Is Pensonic Holdings Berhad's ROCE Trending?
When we looked at the ROCE trend at Pensonic Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. However it looks like Pensonic Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a separate but related note, it's important to know that Pensonic Holdings Berhad has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Pensonic Holdings Berhad's ROCE
In summary, Pensonic Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.