Here's What's Concerning About AME Elite Consortium Berhad's (KLSE:AME) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at AME Elite Consortium Berhad (KLSE:AME) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for AME Elite Consortium Berhad, this is the formula:

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

0.06 = RM58m ÷ (RM1.2b - RM277m) (Based on the trailing twelve months to December 2020).

Therefore, AME Elite Consortium Berhad has an ROCE of 6.0%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 4.8%.

Check out 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'd like, you can check out the forecasts from the analysts covering AME Elite Consortium Berhad here for free.

The Trend Of ROCE

In terms of AME Elite Consortium Berhad's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 6.0% from 9.0% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From AME Elite Consortium Berhad's ROCE

While returns have fallen for AME Elite Consortium Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 64% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 3 warning signs with AME Elite Consortium Berhad and understanding these should be part of your investment process.

While AME Elite Consortium 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. 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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