If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating ECA Integrated Solution Berhad (KLSE:ECA), we don’t think it’s current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on ECA Integrated Solution Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.094 = RM6.4m ÷ (RM75m – RM7.1m) (Based on the trailing twelve months to January 2024).
Therefore, ECA Integrated Solution Berhad has an ROCE of 9.4%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 9.4%.
View our latest analysis for ECA Integrated Solution Berhad
Above you can see how the current ROCE for ECA Integrated Solution Berhad compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free analyst report for ECA Integrated Solution Berhad .
The Trend Of ROCE
On the surface, the trend of ROCE at ECA Integrated Solution Berhad doesn’t inspire confidence. To be more specific, ROCE has fallen from 43% over the last four years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, ECA Integrated Solution Berhad has done well to pay down its current liabilities to 9.5% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line
Bringing it all together, while we’re somewhat encouraged by ECA Integrated Solution Berhad’s reinvestment in its own business, we’re aware that returns are shrinking. Since the stock has declined 52% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
ECA Integrated Solution Berhad does have some risks though, and we’ve spotted 2 warning signs for ECA Integrated Solution Berhad that you might be interested in.
While ECA Integrated Solution 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.
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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.
