Some Investors May Be Worried About Eversafe Rubber Berhad's (KLSE:ESAFE) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Eversafe Rubber Berhad (KLSE:ESAFE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Eversafe Rubber Berhad, this is the formula:

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

0.076 = RM5.8m ÷ (RM111m - RM34m) (Based on the trailing twelve months to March 2021).

So, Eversafe Rubber Berhad has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 4.9% generated by the Auto Components industry, it's much better.

Check out 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.

The Trend Of ROCE

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 7.6% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Eversafe Rubber Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 73% return to shareholders over the last three years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 4 warning signs for Eversafe Rubber Berhad that we think you should be aware of.

While Eversafe Rubber 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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