If you envision a mature business that is past the growth stage, what are the underlying trends that emerge? When we see a drop to return to on capital employed (ROCE) in connection with a decrease based capital employed is often how a mature business shows signs of aging. Ultimately, this means that the company earns less per dollar invested and on top of that, it reduces its capital employed base. So after taking a look at the trends within Pelikan International Corporation Berhad (KLSE: PELIKAN), we didn’t have too much hope.
What is Return on Employee Capital (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Pelikan International Corporation Berhad:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.044 = RM39m ÷ (RM1.3b – RM451m) (Based on the last twelve months up to September 2021).
Therefore, Pelikan International Corporation Berhad has a ROCE of 4.4%. In absolute terms, this is a low return and it is also below the commercial services industry average of 5.9%.
See our latest review for Pelikan International Corporation Berhad
Historical performance is a great place to start when looking for a stock. So above you can see Pelikan International Corporation Berhad’s ROCE gauge against its past performance. If you want to delve into the history of Pelikan International Corporation Berhad earnings, income and cash flow, check out these free graphics here.
What does Pelikan International Corporation Berhad’s ROCE trend tell us?
Pelikan International Corporation Berhad should be cautious as the yields are trending down. Unfortunately, returns on capital have fallen from the 5.9% they earned five years ago. And on the capital employed front, the company is using roughly the same amount of capital as it was back in the day. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their competitive margins. If these trends continue, we don’t expect Pelikan International Corporation Berhad to transform into a multi-bagger.
On the other hand, Pelikan International Corporation Berhad has done well in reducing its current liabilities to 34% of total assets. This could partly explain the drop in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Some argue that this reduces the company’s efficiency in generating ROCE since it now finances more of the operations with its own money.
Our opinion on the ROCE of Pelikan International Corporation Berhad
In summary, it is unfortunate that Pelikan International Corporation Berhad generates lower returns from the same amount of capital. So it’s no surprise that the stock has fallen 41% in the past five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.
If you want to know some of the risks that Pelikan International Corporation Berhad faces, we have found 4 warning signs (2 make us uncomfortable!) Which you should be aware of before investing here.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.