What trends should we look for if we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. With this in mind, we have noticed some promising trends in Ralco Corporation Berhad (KLSE:RALCO) so let’s look a little deeper.
Understanding return on capital employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for Ralco Corporation Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.037 = RM2.3m ÷ (RM78m – RM15m) (Based on the last twelve months to September 2021).
So, Ralco Corporation Berhad has a ROCE of 3.7%. Ultimately, it’s a poor performer and it underperforms the packaging industry average by 12%.
Check out our latest analysis for Ralco Corporation Berhad
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into the history of Ralco Corporation Berhad earnings, revenue, and cash flow, check out these free graphics here.
What can we say about the ROCE trend of Ralco Corporation Berhad?
The fact that Ralco Corporation Berhad is now generating pre-tax profits on its past investments is very encouraging. The company was generating losses five years ago, but is now earning 3.7%, which is a feast for the eyes. And unsurprisingly, like most companies trying to break into the dark, Ralco Corporation Berhad is using 57% more capital than five years ago. This can tell us that the business has plenty of reinvestment opportunities that can generate higher returns.
One last thing to note, Ralco Corporation Berhad reduced current liabilities to 19% of total assets during this period, which effectively reduces the amount of financing from suppliers or short-term creditors. Shareholders would therefore be pleased if the growth in returns came primarily from underlying business performance.
What we can learn from Ralco Corporation Berhad ROCE
Overall, Ralco Corporation Berhad gets a good rating from us, largely due to the fact that it is now profitable and reinvesting in its business. Given that the stock has returned a solid 65% to shareholders over the past five years, it’s fair to say that investors are starting to recognize these changes. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.
If you want to further research Ralco Corporation Berhad, you may be interested to know the 1 warning sign that our analysis found.
Although Ralco Corporation Berhad does not currently generate the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.