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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at EG Industries Berhad (KLSE:EG) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for EG Industries Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.057 = RM25m ÷ (RM1.1b – RM703m) (Based on the trailing twelve months to September 2022).
Therefore, EG Industries Berhad has an ROCE of 5.7%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 11%.
Check out our latest analysis for EG Industries Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for EG Industries Berhad’s ROCE against it’s prior returns. If you’d like to look at how EG Industries Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For EG Industries Berhad Tell Us?
In terms of EG Industries Berhad’s historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 11% over the last five years. 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.
Another thing to note, EG Industries Berhad has a high ratio of current liabilities to total assets of 62%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In summary, despite lower returns in the short term, we’re encouraged to see that EG Industries 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 13% over the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.
EG Industries Berhad does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.
While EG Industries Berhad isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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