The Returns On Capital At Pensonic Holdings Berhad (KLSE:PENSONI) Don't Inspire Confidence

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Pensonic Holdings Berhad (KLSE:PENSONI), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Pensonic Holdings Berhad:

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

0.019 = RM3.2m ÷ (RM269m - RM99m) (Based on the trailing twelve months to November 2023).

So, Pensonic Holdings Berhad has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.

View our latest analysis for Pensonic Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pensonic Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Pensonic Holdings Berhad's past further, check out this free graph covering Pensonic Holdings Berhad's past earnings, revenue and cash flow.

What Does the ROCE Trend For Pensonic Holdings Berhad Tell Us?

In terms of Pensonic Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.4% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Pensonic Holdings Berhad to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 65% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Pensonic Holdings Berhad does have some risks though, and we've spotted 2 warning signs for Pensonic Holdings Berhad that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.