CB Industrial Product Holding Berhad's (KLSE:CBIP) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at CB Industrial Product Holding Berhad (KLSE:CBIP) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for CB Industrial Product Holding Berhad:

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

0.063 = RM62m ÷ (RM1.1b - RM140m) (Based on the trailing twelve months to March 2022).

So, CB Industrial Product Holding Berhad has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

View our latest analysis for CB Industrial Product Holding Berhad

In the above chart we have measured CB Industrial Product Holding 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 CB Industrial Product Holding Berhad here for free.

How Are Returns Trending?

In terms of CB Industrial Product Holding Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by CB Industrial Product Holding Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. Therefore based on the analysis done in this article, we don't think CB Industrial Product Holding Berhad has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for CB Industrial Product Holding Berhad you'll probably want to know about.

While CB Industrial Product Holding 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.