What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Uzma Berhad (KLSE:UZMA) so let's look a bit deeper.
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 Uzma Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = RM54m ÷ (RM1.2b - RM372m) (Based on the trailing twelve months to December 2022).
Thus, Uzma Berhad has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.7%.
Check out our latest analysis for Uzma Berhad
In the above chart we have measured Uzma Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Uzma Berhad.
What The Trend Of ROCE Can Tell Us
Uzma Berhad's ROCE growth is quite impressive. 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 37% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
What We Can Learn From Uzma Berhad's ROCE
To bring it all together, Uzma Berhad has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 54% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing to note, we've identified 2 warning signs with Uzma Berhad and understanding them should be part of your investment process.