Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Poh Kong Holdings Berhad (KLSE:POHKONG) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Poh Kong Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = RM144m ÷ (RM1.1b - RM214m) (Based on the trailing twelve months to April 2024).
Therefore, Poh Kong Holdings Berhad has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.2% it's much better.
Check out our latest analysis for Poh Kong 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 , check out these free graphs detailing revenue and cash flow performance of Poh Kong Holdings Berhad.
How Are Returns Trending?
We like the trends that we're seeing from Poh Kong Holdings Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
All in all, it's terrific to see that Poh Kong Holdings Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 138% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to continue researching Poh Kong Holdings Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.