When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This combination can tell you that not only is the company investing less, it’s earning less on what it does invest. And from a first read, things don’t look too good at Panasonic Manufacturing Malaysia Berhad (KLSE:PANAMY), so let’s see why.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Panasonic Manufacturing Malaysia Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.021 = RM16m ÷ (RM912m – RM134m) (Based on the trailing twelve months to June 2022).
Thus, Panasonic Manufacturing Malaysia Berhad has an ROCE of 2.1%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 10%.
View our latest analysis for Panasonic Manufacturing Malaysia Berhad
In the above chart we have measured Panasonic Manufacturing Malaysia Berhad’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Panasonic Manufacturing Malaysia Berhad here for free.
The Trend Of ROCE
In terms of Panasonic Manufacturing Malaysia Berhad’s historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. If these trends continue, we wouldn’t expect Panasonic Manufacturing Malaysia Berhad to turn into a multi-bagger.
In summary, it’s unfortunate that Panasonic Manufacturing Malaysia Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 26% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we’d consider looking elsewhere.
On a final note, we found 2 warning signs for Panasonic Manufacturing Malaysia Berhad (1 doesn’t sit too well with us) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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