If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Greatech Technology Berhad (KLSE:GREATEC), it didn't seem to tick all of these boxes.

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 Greatech Technology Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = RM133m ÷ (RM953m - RM219m) (Based on the trailing twelve months to September 2023).

So, Greatech Technology Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Semiconductor industry.

View our latest analysis for Greatech Technology Berhad

In the above chart we have measured Greatech Technology Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Greatech Technology Berhad.

What Does the ROCE Trend For Greatech Technology Berhad Tell Us?

When we looked at the ROCE trend at Greatech Technology Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 35%, 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 23% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Greatech Technology Berhad's ROCE

While returns have fallen for Greatech Technology Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 12% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.