Eversafe Rubber Berhad (KLSE:ESAFE) Could Be Struggling To Allocate Capital

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. 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. Although, when we looked at Eversafe Rubber Berhad (KLSE:ESAFE), it didn't seem to tick all of these boxes.

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 Eversafe Rubber Berhad is:

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

0.069 = RM5.2m ÷ (RM109m - RM34m) (Based on the trailing twelve months to December 2020).

Thus, Eversafe Rubber Berhad has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 3.4%.

View our latest analysis for Eversafe Rubber Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Eversafe Rubber Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Eversafe Rubber Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.9% from 12% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Eversafe Rubber Berhad's ROCE

We're a bit apprehensive about Eversafe Rubber Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Eversafe Rubber Berhad we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

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