If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Perak Transit Berhad (KLSE:PTRANS), it didn't seem to tick all of these boxes.
What Is 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 Perak Transit Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = RM92m ÷ (RM1.3b - RM86m) (Based on the trailing twelve months to December 2023).
Therefore, Perak Transit Berhad has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 6.4% generated by the Transportation industry, it's much better.
Check out our latest analysis for Perak Transit Berhad
In the above chart we have measured Perak Transit Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Perak Transit Berhad .
How Are Returns Trending?
The returns on capital haven't changed much for Perak Transit Berhad in recent years. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 159% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
Long story short, while Perak Transit Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 110% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to know some of the risks facing Perak Transit Berhad we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.