What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Reneuco Berhad (KLSE:RENEUCO) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Reneuco Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = RM7.7m ÷ (RM391m - RM160m) (Based on the trailing twelve months to December 2022).
Thus, Reneuco Berhad has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.
Check out our latest analysis for Reneuco Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Reneuco Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that Reneuco Berhad is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Reneuco Berhad is utilizing 673% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
What We Can Learn From Reneuco Berhad's ROCE
Overall, Reneuco Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 54% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.