Here's What To Make Of AME Elite Consortium Berhad's (KLSE:AME) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at AME Elite Consortium Berhad (KLSE:AME) and its ROCE trend, we weren't exactly thrilled.

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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 AME Elite Consortium Berhad is:

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

0.079 = RM99m ÷ (RM2.1b - RM864m) (Based on the trailing twelve months to December 2024).

So, AME Elite Consortium Berhad has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10.0%.

View our latest analysis for AME Elite Consortium Berhad

In the above chart we have measured AME Elite Consortium Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for AME Elite Consortium Berhad .

So How Is AME Elite Consortium Berhad's ROCE Trending?

The returns on capital haven't changed much for AME Elite Consortium Berhad in recent years. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 31% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 41% of total assets, this reported ROCE would probably be less than7.9% because total capital employed would be higher.The 7.9% ROCE could be even lower if current liabilities weren't 41% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

In Conclusion...

Long story short, while AME Elite Consortium Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 2 warning signs with AME Elite Consortium Berhad and understanding them should be part of your investment process.

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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.