Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Greatech Technology Berhad (KLSE:GREATEC), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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)
0.16 = RM131m ÷ (RM1.1b - RM246m) (Based on the trailing twelve months to March 2024).
Thus, Greatech Technology Berhad has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 7.5% it's much better.
Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Greatech Technology Berhad .
So How Is Greatech Technology Berhad's ROCE Trending?
On the surface, the trend of ROCE at Greatech Technology Berhad doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 16%. 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 side note, Greatech Technology Berhad has done well to pay down its current liabilities to 23% 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.