If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, APB Resources Berhad (KLSE:APB) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on APB Resources Berhad is:

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

0.055 = RM8.5m ÷ (RM171m - RM15m) (Based on the trailing twelve months to September 2022).

Therefore, APB Resources Berhad has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 14%.

See our latest analysis for APB Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for APB Resources Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of APB Resources Berhad, check out these free graphs here.

So How Is APB Resources Berhad's ROCE Trending?

APB Resources Berhad is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 176% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To sum it up, APB Resources Berhad is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last five years. In light of that, we think it's worth looking further into this stock because if APB Resources Berhad can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with APB Resources Berhad (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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