What Do The Returns On Capital At Eversafe Rubber Berhad (KLSE:ESAFE) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Eversafe Rubber Berhad (KLSE:ESAFE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Eversafe Rubber Berhad:

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

0.083 = RM6.5m ÷ (RM112m - RM34m) (Based on the trailing twelve months to September 2020).

So, Eversafe Rubber Berhad has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.9%.

View our latest analysis for Eversafe Rubber Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eversafe Rubber Berhad's ROCE against it's prior returns. If you'd like to look at how Eversafe Rubber Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Eversafe Rubber Berhad Tell Us?

On the surface, the trend of ROCE at Eversafe Rubber Berhad doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.3%. However it looks like Eversafe Rubber Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Eversafe Rubber Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 12% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Eversafe Rubber Berhad has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Eversafe Rubber Berhad (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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