Investors Will Want Protasco Berhad's (KLSE:PRTASCO) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Protasco Berhad's (KLSE:PRTASCO) returns on capital, so let's have a look.

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. The formula for this calculation on Protasco Berhad is:

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

0.11 = RM45m ÷ (RM918m - RM507m) (Based on the trailing twelve months to December 2023).

Therefore, Protasco Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 6.4% it's much better.

See our latest analysis for Protasco 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 Protasco Berhad.

What Can We Tell From Protasco Berhad's ROCE Trend?

Like most people, we're pleased that Protasco Berhad is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 11% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 21%. This could potentially mean that the company is selling some of its assets.

On a side note, Protasco Berhad's current liabilities are still rather high at 55% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

From what we've seen above, Protasco Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 10% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 2 warning signs we've spotted with Protasco Berhad (including 1 which is significant) .

While Protasco Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.