What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Eden Berhad's (KLSE:EDEN) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Eden Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = RM5.3m ÷ (RM392m - RM71m) (Based on the trailing twelve months to December 2022).
So, Eden Berhad has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.4%.
View our latest analysis for Eden Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Eden Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eden Berhad, check out these free graphs here.
What Does the ROCE Trend For Eden Berhad Tell Us?
Eden Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.7%, which is always encouraging. 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line
As discussed above, Eden Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 19% to shareholders. So with that in mind, we think the stock deserves further research.