If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Chuan Huat Resources Berhad (KLSE:CHUAN) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Chuan Huat Resources Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = RM11m ÷ (RM621m - RM240m) (Based on the trailing twelve months to September 2022).
Therefore, Chuan Huat Resources Berhad has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 8.3%.
View our latest analysis for Chuan Huat Resources Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Chuan Huat Resources Berhad, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Chuan Huat Resources Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 6.2% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Chuan Huat Resources Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Chuan Huat Resources Berhad is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 8.6% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you want to know some of the risks facing Chuan Huat Resources Berhad we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.