If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at EA Holdings Berhad (KLSE:EAH) so let's look a bit deeper.
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 EA Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0094 = RM1.3m ÷ (RM145m - RM9.1m) (Based on the trailing twelve months to June 2022).
Therefore, EA Holdings Berhad has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.
See our latest analysis for EA Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for EA Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating EA Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From EA Holdings Berhad's ROCE Trend?
Shareholders will be relieved that EA Holdings Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.9% on its capital. While returns have increased, the amount of capital employed by EA Holdings Berhad has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
In Conclusion...
As discussed above, EA Holdings Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
EA Holdings Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...