Boustead Heavy Industries Corporation Berhad (KLSE:BHIC) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Boustead Heavy Industries Corporation Berhad's (KLSE:BHIC) returns on capital, so let's have a look.

Our free stock report includes 4 warning signs investors should be aware of before investing in Boustead Heavy Industries Corporation Berhad. Read for free now.

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 Boustead Heavy Industries Corporation Berhad is:

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

0.30 = RM32m ÷ (RM263m - RM155m) (Based on the trailing twelve months to December 2024).

Therefore, Boustead Heavy Industries Corporation Berhad has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Machinery industry average of 8.2%.

Check out our latest analysis for Boustead Heavy Industries Corporation Berhad

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

The Trend Of ROCE

Like most people, we're pleased that Boustead Heavy Industries Corporation Berhad is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 30% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 44%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a separate but related note, it's important to know that Boustead Heavy Industries Corporation Berhad has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's great to see that Boustead Heavy Industries Corporation Berhad has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 51% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 4 warning signs for Boustead Heavy Industries Corporation Berhad that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.