Ahmad Zaki Resources Berhad's (KLSE:AZRB) Returns On Capital Are Heading Higher

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Ahmad Zaki Resources Berhad (KLSE:AZRB) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Ahmad Zaki Resources Berhad is:

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

0.028 = RM84m ÷ (RM4.4b - RM1.4b) (Based on the trailing twelve months to December 2023).

Thus, Ahmad Zaki Resources Berhad has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.1%.

See our latest analysis for Ahmad Zaki Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ahmad Zaki Resources Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ahmad Zaki Resources Berhad.

What Can We Tell From Ahmad Zaki Resources Berhad's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 259% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Ahmad Zaki Resources Berhad's ROCE

In summary, we're delighted to see that Ahmad Zaki Resources Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 55% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ahmad Zaki Resources Berhad (of which 1 is potentially serious!) that you should know about.

While Ahmad Zaki Resources 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. 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.