Returns On Capital At ECA Integrated Solution Berhad (KLSE:ECA) Paint A Concerning Picture

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating ECA Integrated Solution Berhad (KLSE:ECA), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for ECA Integrated Solution Berhad:

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

0.17 = RM11m ÷ (RM71m - RM6.5m) (Based on the trailing twelve months to October 2023).

So, ECA Integrated Solution Berhad has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Machinery industry.

Check out our latest analysis for ECA Integrated Solution Berhad

Above you can see how the current ROCE for ECA Integrated Solution Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ECA Integrated Solution Berhad here for free.

What Can We Tell From ECA Integrated Solution Berhad's ROCE Trend?

When we looked at the ROCE trend at ECA Integrated Solution Berhad, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 17% from 34% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, ECA Integrated Solution Berhad has decreased its current liabilities to 9.1% of total assets. Considering it used to be 67%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ECA Integrated Solution Berhad. These growth trends haven't led to growth returns though, since the stock has fallen 39% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about ECA Integrated Solution Berhad, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While ECA Integrated Solution 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.