If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Omesti Berhad (KLSE:OMESTI) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Omesti Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = RM27m ÷ (RM684m - RM249m) (Based on the trailing twelve months to June 2022).
Therefore, Omesti Berhad has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 15%.
View our latest analysis for Omesti Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Omesti Berhad's ROCE against it's prior returns. If you'd like to look at how Omesti Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Omesti Berhad's ROCE Trending?
Omesti Berhad has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 6.2% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From Omesti Berhad's ROCE
To the delight of most shareholders, Omesti Berhad has now broken into profitability. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Omesti Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.