If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Greatech Technology Berhad (KLSE:GREATEC) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Greatech Technology Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = RM113m ÷ (RM980m - RM336m) (Based on the trailing twelve months to March 2023).
Thus, Greatech Technology Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Semiconductor industry.
See our latest analysis for Greatech Technology Berhad
Above you can see how the current ROCE for Greatech Technology Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
In terms of Greatech Technology Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 41%, but since then they've fallen to 18%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Greatech Technology Berhad has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Greatech Technology Berhad is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 129% return over the last three years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.