There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Concrete Engineering Products Berhad (KLSE:CEPCO) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Concrete Engineering Products Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = RM6.0m ÷ (RM129m - RM67m) (Based on the trailing twelve months to February 2024).
So, Concrete Engineering Products Berhad has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 6.9% generated by the Basic Materials industry, it's much better.
Check out our latest analysis for Concrete Engineering Products 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're interested in investigating Concrete Engineering Products Berhad's past further, check out this free graph covering Concrete Engineering Products Berhad's past earnings, revenue and cash flow.
What Does the ROCE Trend For Concrete Engineering Products Berhad Tell Us?
Like most people, we're pleased that Concrete Engineering Products Berhad is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Concrete Engineering Products Berhad is using 44% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 52% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.