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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Globaltec Formation Berhad (KLSE:GLOTEC) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Globaltec Formation Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = RM21m ÷ (RM404m - RM76m) (Based on the trailing twelve months to December 2022).
So, Globaltec Formation Berhad has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 16%.
View our latest analysis for Globaltec Formation Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Globaltec Formation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Globaltec Formation Berhad, check out these free graphs here.
The Trend Of ROCE
We're delighted to see that Globaltec Formation Berhad is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.5% on its capital. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On Globaltec Formation Berhad's ROCE
As discussed above, Globaltec Formation Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 40% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.