Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at EITA Resources Berhad (KLSE:EITA) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for EITA Resources Berhad, this is the formula:

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

0.054 = RM12m ÷ (RM332m - RM107m) (Based on the trailing twelve months to March 2023).

So, EITA Resources Berhad has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View our latest analysis for EITA Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for EITA Resources Berhad's ROCE against it's prior returns. If you're interested in investigating EITA Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at EITA Resources Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.4% from 12% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

We're a bit apprehensive about EITA Resources Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 45% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.