Padini Holdings Berhad (KLSE:PADINI) Will Want To Turn Around Its Return Trends
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Padini Holdings Berhad (KLSE:PADINI), it does have a high ROCE right now, but lets see how returns are trending.
Return On Capital Employed (ROCE): What Is It?
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 Padini Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = RM293m ÷ (RM1.6b - RM316m) (Based on the trailing twelve months to September 2022).
Thus, Padini Holdings Berhad has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.
See our latest analysis for Padini Holdings Berhad
In the above chart we have measured Padini Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Padini Holdings Berhad's ROCE Trending?
When we looked at the ROCE trend at Padini Holdings Berhad, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 36%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In summary, despite lower returns in the short term, we're encouraged to see that Padini Holdings Berhad is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing, we've spotted 1 warning sign facing Padini Holdings Berhad that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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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