What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So on that note, Puncak Niaga Holdings Berhad (KLSE:PUNCAK) looks quite promising in regards to its trends of return on capital.

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

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. To calculate this metric for Puncak Niaga Holdings Berhad, this is the formula:

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

0.027 = RM67m ÷ (RM3.0b - RM466m) (Based on the trailing twelve months to June 2023).

Thus, Puncak Niaga Holdings Berhad has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 7.0%.

See our latest analysis for Puncak Niaga Holdings Berhad

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

The Trend Of ROCE

We're delighted to see that Puncak Niaga Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company now earns 2.7% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Puncak Niaga Holdings Berhad's ROCE

As discussed above, Puncak Niaga Holdings Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.