What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Globaltec Formation Berhad (KLSE:GLOTEC) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Globaltec Formation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = RM8.8m ÷ (RM412m - RM73m) (Based on the trailing twelve months to December 2023).
Thus, Globaltec Formation Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.
See our latest analysis for Globaltec Formation 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 , check out these free graphs detailing revenue and cash flow performance of Globaltec Formation Berhad.
The Trend Of ROCE
There hasn't been much to report for Globaltec Formation Berhad's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Globaltec Formation Berhad in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line
We can conclude that in regards to Globaltec Formation Berhad's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing to note, we've identified 3 warning signs with Globaltec Formation Berhad and understanding them should be part of your investment process.