Returns On Capital Signal Tricky Times Ahead For HPP Holdings Berhad (KLSE:HPPHB)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think HPP Holdings Berhad (KLSE:HPPHB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on HPP Holdings Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.075 = RM11m ÷ (RM154m - RM12m) (Based on the trailing twelve months to August 2023).

Thus, HPP Holdings Berhad has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Packaging industry average of 9.3%.

See our latest analysis for HPP Holdings Berhad

Above you can see how the current ROCE for HPP Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering HPP Holdings Berhad here for free.

The Trend Of ROCE

When we looked at the ROCE trend at HPP Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 7.5%. 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.

What We Can Learn From HPP Holdings Berhad's ROCE

In summary, we're somewhat concerned by HPP Holdings Berhad's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 17% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 2 warning signs for HPP Holdings Berhad you'll probably want to know about.

While HPP Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.