There's Been No Shortage Of Growth Recently For EG Industries Berhad's (KLSE:EG) Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in EG Industries Berhad's (KLSE:EG) returns on capital, so let's have a look.

What Is 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. Analysts use this formula to calculate it for EG Industries Berhad:

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

0.11 = RM71m ÷ (RM1.2b - RM613m) (Based on the trailing twelve months to December 2023).

Therefore, EG Industries Berhad has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 10%.

View our latest analysis for EG Industries Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for EG Industries Berhad's ROCE against it's prior returns. If you're interested in investigating EG Industries Berhad's past further, check out this free graph covering EG Industries Berhad's past earnings, revenue and cash flow.

So How Is EG Industries Berhad's ROCE Trending?

We like the trends that we're seeing from EG Industries Berhad. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 85%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that EG Industries Berhad has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From EG Industries Berhad's ROCE

To sum it up, EG Industries Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

EG Industries Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While EG Industries Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.